We study a financial market economy with a continuum of borrowers and pooling of borrowers’ promises. Under these conditions and in the absence of designing costs, utility-maximizing decisions of price-taking borrowers may lead to financial market incompleteness. Parametrizing equilibria through the borrowers’ no-arbitrage beliefs, we link expectations to the financial market structure. Markets are complete if and only if borrowers’ beliefs are homogeneous. Price-taking behavior causes a coordination problem which in turn yields indeterminacy and inefficiency of equilibrium allocations.
Pooling and Endogenous Market Incompleteness / A. CITANNA; A. VILLANACCI. - In: ECONOMIC THEORY. - ISSN 0938-2259. - STAMPA. - 24:(2004), pp. 549-560.
Pooling and Endogenous Market Incompleteness
VILLANACCI, ANTONIO
2004
Abstract
We study a financial market economy with a continuum of borrowers and pooling of borrowers’ promises. Under these conditions and in the absence of designing costs, utility-maximizing decisions of price-taking borrowers may lead to financial market incompleteness. Parametrizing equilibria through the borrowers’ no-arbitrage beliefs, we link expectations to the financial market structure. Markets are complete if and only if borrowers’ beliefs are homogeneous. Price-taking behavior causes a coordination problem which in turn yields indeterminacy and inefficiency of equilibrium allocations.File | Dimensione | Formato | |
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