Framework

S distinct states of the world

(S finite)
states of the world are mutually exclusive, and states are
verifiable

rc dy
i.e. : I can write a contract to buy 1 unit of good m in state of

as
the world s, and, when the true state of the world gets revealed
there will be no dispute as to whether we’re in state s or not
stu
ew
s
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Timing

trade takes place, in contingent commodities, before

uncertainty gets resolved
so there are now LS “commodities” : pms is the price of one unit
of good m in state s

each person has an LS–dimensional endowmment vector

ω i ≡ (ω11
i , ω i , . . . , ω i , ω i , ω i , . . . , ω i ), where ω i

rc dy
21 L1 12 22 LS ms is person

as
i’s endowment of good m in state of the world s
stu
and person i’s preferences are defined over LS–dimensional

ew
consumption bundles xi ≡ (x11i , xi , . . . , xi , xi , xi , . . . , xi )
21 L1 12 22 LS
s
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Ex Ante

the consumer’s preferences should be regarded as ex ante

preferences

an example of this sort of preferences would be a von

Neumann–Morgenstern expected utility function
U i (xi ) ≡ s πsi u i (x1s
i , x i , . . . , x i ) where u i is an “ordinary”
P
2s Ls
(non–state–contingent) utility function defined over

rc dy
as
L–dimensional bundles of goods, the πsi ’s are subjective
probabilities, and the overall utility function U i maps
stu
ew
LS–dimensional contingent consumption vectors into R
s
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we can have production too : some technology set again
defined over LS–dimensional bundles
e.g. : different technologies for different states : if y ∈ Y j , then
there is at most one state s for which any yms 6= 0
or e.g. 19.B.2 in Mas–Colell, Whinston and Green, in which
inputs are used in all states of the world, but the level of output

rc dy
produced varies with the state of the world (so that input

as
decisions are made before the resolution of the uncertainty,
outputs are realized after) stu
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s
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Everything Stays the Same

in this contingent–commodity world, all the results hold from

chapters 16 and 17 :
formally there is no difference between an economy with 1200
goods, and economy with 30 different goods and 40 states of
the world, as long as we can buy and sell each of the 30 goods
(separately) in each of the 40 states
so

rc dy
the first fundamental theorem of welfare economics holds

as
the second fundamental theorem holds — if technology and
stu
ew
preferences are convex (and everyone has a positive
endowment of every good in every state of the world)
and a Walrasian equilibrium must exist if preferences and
s
technology are convex
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