Anything Goes Theorem, Incomplete Markets and Ricardian Equivalence Hypothesis

Abstract

In this paper, Anything Goes: The Sonnenschein-Mantel-Debreu theorem (following the work of Sonnenchein (1972, 1973), Mantel (1974), and Debreu (1974)), has been applied to incomplete markets, Bottazzi, J.-M. and T. Hens (1996), in order to test the Ricardian equivalence hypothesis. In the naïve economic environment where public debt has a perfect substitute in lump-sum taxes the RET fails if one allows payoff matrix of economic agents to vary. If the law of one price does not apply (if any two portfolios have equal payoffs than their prices should be equal too) and that the payoffs are risk free.

Keywords: Anything Goes, RET Hypothesis, Incomplete Markets, Equilibrium

JEL Classification: C62, D50