The Structure of Equilibria in Trading Networks with Frictions

TL;DR

This paper establishes key structural properties of competitive equilibria in trading networks with frictions, extending classical results to more complex and realistic economic models with imperfect transferability and frictions.

Contribution

It generalizes fundamental equilibrium theorems to trading networks with frictions, including imperfect transferability, and links these results to exchange economies and matching markets.

Findings

Lattice theorem holds with frictions

Rural hospitals theorem extended to these settings

Existence of side-optimal equilibria proven

Abstract

Several structural results for the set of competitive equilibria in trading networks with frictions are established: The lattice theorem, the rural hospitals theorem, the existence of side-optimal equilibria, and a group-incentive-compatibility result hold with imperfectly transferable utility and in the presence of frictions. While our results are developed in a trading network model, they also imply analogous (and new) results for exchange economies with combinatorial demand and for two-sided matching markets with transfers.