Book contents
- Frontmatter
- Contents
- Preface
- Chapter 1 Introduction
- Chapter 2 Performance criteria
- Chapter 3 The Arrow–Debreu world
- Chapter 4 Uncertainty
- Chapter 5 Incentive compatibility
- Chapter 6 Existence of a competitive equilibrium
- Chapter 7 Welfare properties of the Walrasian mechanism
- Appendix 1 Elements of consumer choice
- Appendix 2 The Edgeworth exchange economy
- Appendix 3 Proof of the Shafer–Sonnenschein theorem
- References
- Author index
- Subject index
Chapter 4 - Uncertainty
Published online by Cambridge University Press: 05 June 2012
- Frontmatter
- Contents
- Preface
- Chapter 1 Introduction
- Chapter 2 Performance criteria
- Chapter 3 The Arrow–Debreu world
- Chapter 4 Uncertainty
- Chapter 5 Incentive compatibility
- Chapter 6 Existence of a competitive equilibrium
- Chapter 7 Welfare properties of the Walrasian mechanism
- Appendix 1 Elements of consumer choice
- Appendix 2 The Edgeworth exchange economy
- Appendix 3 Proof of the Shafer–Sonnenschein theorem
- References
- Author index
- Subject index
Summary
Uncertainty affects individual welfare in a variety of ways. This chapter deals with one of the most important consequences of the vicissitudes of nature, the randomness of initial endowments and of the input–output relationship in production. A career choice, for example, is a decision to acquire certain skills that become part of one's endowment and that can be more or less rewarding depending on occurrences that are random from the standpoint of the individual decision-maker. Bad weather can affect crops, and a farmer will not know with certainty the size of the harvest even though he or she knows how much seed was planted. Fire and flood can destroy homes. The first and last examples are consistent with a change in a person's preferences for commodities. However, we will simplify by supposing that individual preferences do not change as random events are realized even though a serious injury, say, can cause a change in preference because it affects one's ability to participate in some activities. Subject to this simplifying assumption, the Arrow–Debreu interpretation of the market mechanism is easily extended to accommodate uncertainty. All that is required is a reinterpretation of the notion of a commodity. Just as we distinguish an automobile delivered at one date from the same physical object at another date, insisting that they be identified as two different goods, so we also distinguish between an automobile delivered at one date when one specific random event is realized and the same automobile available at the same date under a different realization.
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- Information
- Resource Allocation Mechanisms , pp. 65 - 108Publisher: Cambridge University PressPrint publication year: 1987