Lotteries, sunspots, and incentive constraints

Timothy J. Kehoe, David K. Levine, Edward C. Prescott

Research output: Contribution to journalArticlepeer-review

24 Scopus citations


We study a prototypical class of exchange economies with private information and indivisibilities. We establish an equivalence between lottery equilibria and sunspot equilibria and show that the welfare and existence theorems hold. To establish these results, we introduce the concept of the stand-in consumer economy, which is a standard, convex, finite consumer, finite good, pure exchange economy. With decreasing absolute risk aversion and no indivisibilities, we prove that no lotteries are actually used in equilibrium. We provide a simple numerical example with increasing absolute risk aversion in which lotteries are necessarily used in equilibrium. We also show how the equilibrium allocation in this example can be implemented in a sunspot equilibrium. Journal of Economic Literature Classification Numbers: D11, D50, D82.

Original languageEnglish (US)
Pages (from-to)39-69
Number of pages31
JournalJournal of Economic Theory
Issue number1
StatePublished - Nov 1 2002
Externally publishedYes

ASJC Scopus subject areas

  • Economics and Econometrics


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