A note on "fulfilled expectations" equilibria
In this note, the “fulfilled expectations” equilibrium notion, found in Green [3], Grossman [5], and Kihlstrom and Mirman [S], is used to analyze a simple model of a repeated futures market. (The model used is similar to one advanced by Stiglitz [ 111.) We are primarily interested in examining this equilibrium notion in the context of this simple model, and we find that it gives rise to a number of very interesting economic phenomena. The model is specified in Section 2. The market considered exists solely for insurance purposes: Speculators have random nonmarket income which may be statistically dependent on a price which will prevail in an upcoming spot market. By speculating in a futures market for the spot market commodity, they can hedge against adverse fluctuations in their nonmarket income. (Presumably, this takes place in a world without a complete set of contingent markets.) In Section 3, the “fulfilled expectations” equilibrium notion is advanced in the context of this model. Economic motivation for this notion is given. An economic difficulty is immediately encountered: Information originally possessed by no speculator may be transmitted by equilibrium prices. This is easily resolved, by restricting attention to prices which contain no more information than is possessed by all the speculators. However, when attention is so restricted, another problem is encountered: An equilibrium need not exist. An example of this is given in Section 4. Another difficulty with this equilibrium concept arises in connection with the standard notion of a demand correspondence. Roughly, a