The theory of general equilibrium with incomplete markets (GEI) studies the pricing of securities and commodities, and the interactions of perfectly competitive asset markets and commodity markets in determining consumption and investment. Since financial economics is fundamentally concerned with the pricing of securities, and since macroeconomics is fundamentally concerned with the real effects of monetary assets, the GEI model provides a framework for a microeconomic analysis that touches a large number of different fields. The purpose of this project is to extend the theory of GEI to incorporate money, production, and default with asymmetric information. The contributions of this project are important because many phenomena that cannot be described in the traditional Arrow-Debreu model come to light in these incomplete asset markets model. These include the distinction between real and financial assets, the limitations for understanding local uniqueness and efficiency of representative agent and single commodity models, the importance of diversification, the dependence of asset prices on covariances and not variances, the "random walk" or martingale property of asset prices, the relevance or possible irrelevance of corporate financial policy, the rationale for lenient bankruptcy and default penalties, the ambiguity of firm objectives, and a positive role for government redirection of private investment and risk taking decisions.
