In competitive asset markets, consumers make intertemporal choices in an uncertain environment. Their attitudes toward risk, production opportunities, and the nature of trades that they can enter into determine equilibrium quantities and the prices of assets that are traded. The intertemporal choice problem of a consumer in an uncertain environment yields restrictions for the behavior of individual consumption over time as well as determining the form of the asset-pricing function used to price random payoffs.

We begin by describing the simplest setup in which consumer choices are made and asset prices are determined, namely, a complete contingent claims equilibrium for a pure endowment economy. In such an equilibrium, a consumer can trade claims to contracts with payoffs that depend on the state of the world, for all possible states. As a precursor of the material to follow, we discuss the relationship of the complete contingent claims equilibrium to security market equilibrium and describe its implications for asset pricing.

The complete contingent claims equilibrium can also be used to derive restrictions for the behavior of consumption allocations. In this context, we discuss the relationship between the contingent claims equilibrium and Pareto optimality, and show the existence of a “representative consumer” that can be constructed by exploiting the Pareto optimality of the contingent claims equilibrium. Some conclusions follow.