The Second Welfare Theorem in Economies with Non-Walrasian Markets

Abstract

The standard version of the second welfare theorem assumes that market operations produce Walrasian outcomes. Therefore, if there are individuals who can manipulate prices, the conclusion of the second welfare theorem is questionable. In this paper, we address the decentralization of a Pareto-optimal allocation, when markets are non-Walrasian. Our objective in this paper is to develop a game which can implement Pareto-optimal allocations as Nash equilibria of strategic exchange in markets. In this way, we develop a version of the second welfare theorem for economies where markets are strategic. © 2014 Wiley Periodicals, Inc.