ASSET PRICING MODEL: Concluding remarks 3

The economically feasible set for firm i reflects the fact that no investor wants to enter negative NPV investments at date 1 read only:

Letting ц denote the multiplier of the break-even constraint, optimization with respect to L*,, together with the equilibrium condition Ь% = yields
Remark. In Program I, we did not consider individual rationality constraints for the entrepreneurs because such constraints only affect the set of feasible weights Щ-

Let us now show that a decentralized equilibrium of a market for state-contingent liquidity can be construed as an optimal coordinated plan. Suppose that the firms at date 0 contract on their date-1, state-contingent liquidity in a perfect market. Let т(ш) denote the net cost of one unit of liquidity in state ш. That is, in order to receive Lj(u>) in state ш, for all ш, firm i must pay

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