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Nobel Prize winner: Hicks/Arrow PART 3 (Arrow- Imperfect Information…
Nobel Prize winner: Hicks/Arrow PART 3
Arrow- General equilibrium theory
Relation to Walras:
Walras had not shown proof of existence of equilibrium
Arrow did (with Gerard Debreu)
Relation to Smith:
Prices adjust until markets clear in perfectly competitive
markets
Simply reaffirmed what Adam Smith had observed 160 years earlier
Arrow- Imperfect Information
Mostly in “insurance markets”
Due to information imperfections, free markets may not be able to solve the problem without any intervention
1963 AER paper on medical care:
Moral hazard
Adverse selection
Arrow- Imperfect Information
Related to the work of Akerlof!
Arrow also showed how uncertainty could be incorporated in
general equilibrium model:
State-contingent claims
Two main theorems of welfare economics hold
Conclusion
Still standard elements of contemporary economics
Both also made important contributions on other topics
Hicks and Arrow responsible for important contributions, only acknowledged many years after their discovery.