When Borch’s Theorem does not apply: some key implications of market incompleteness, with policy relevance today
Markets are incomplete when the assets available to the agents do not span the space of future contingencies. Efficiency is then assessed by the weak criterion of "constrained efficiency" (efficiency relative to the set of allocations compatible with the asset structure). That criterion requires firms to optimise relative to shadow-prices reflecting shareholders’ preferences. Yet, even when firms do so, competitive equilibria on the markets for assets and commodities fail (generically) to be constrained efficient (section 3). Pareto-superior allocations can be implemented through price/wage rigidities and quantity constraints (section 4). But nominal rigidities are conducive to multiple equilibria, implying endogenous macroeconomic uncertainties that compound the primitive (exogenous) uncertainties (section 5). Various policy implications can be drawn, which are of some relevance to the current crisis.
Year of publication: |
2013-04-26
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Authors: | DREZE, Jacques |
Institutions: | Center for Operations Research and Econometrics (CORE), École des Sciences Économiques de Louvain |
Subject: | general equilibrium | incomplete markets | temporary equilibrium | constrained efficiency | price rigidities | multiple equilibria | coordination failures | Phillips curve |
Saved in:
freely available
Extent: | application/pdf |
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Series: | |
Type of publication: | Book / Working Paper |
Notes: | The text is part of a series UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE) Number 2013009 |
Classification: | D50 - General Equilibrium and Disequilibrium. General ; D52 - Incomplete Markets ; D82 - Asymmetric and Private Information |
Source: |
Persistent link: https://www.econbiz.de/10010662664
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