ABSTRACT
The objective of general equilibrium theory is to understand how the complex structure of contractual markets, characteristic of a modern economy, provides a mechanism for agents to coordinate their decisions, share their risks and create appropriate incentives, in an evolving intertemporal setting with uncertainty. This theory provides a highly idealized, abstract model of markets working at their best: the nature of the markets and the underlying contracts envisioned is austere and idealized in the extreme. Introducing the moral hazard problem of corporate management into a general equilibrium framework permits two opposing views on the merits of the stock market to be studied in a common framework. A significant part of the research on general equilibrium models has been devoted to studying sequential models – the Arrow–Debreu assumption that all contracts are traded at an initial date being replaced by the more realistic assumption that there is trade at each date-event.
