Competitive equilibria and the grand coalition

Resumo

We provide a new characterization of competitive equilibrium allocations based on the veto mechanism. In order to test whether an allocation is competitive, we define a family of economies by perturbing the initial endowments of a coalition, and check whether this allocation is dominated in the perturbed economies. Indeed, in pure exchange economies with a continuum of non-atomic agents, the competitive equilibria are characterized by the veto power of the grand coalition, formed by all the agents in the economy. The welfare theorems are obtained as easy corollaries of our main result.