A case for incomplete markets

Lawrence E. Blume; Timothy Cogley; David A. Easley; Thomas J. Sargent; Viktor Tsyrennikov

doi:10.1016/j.jet.2018.09.004

A case for incomplete markets

Lawrence E. Blume, Timothy Cogley, David A. Easley, Thomas J. Sargent, Viktor Tsyrennikov

Research output: Contribution to journal › Article › peer-review

Abstract

If two rational agents want to trade and there are no externalities, then trade is Pareto improving. Economists generally oppose restrictions on such trade. Complete markets allocations are Pareto optimal and thus complete markets are generally viewed as good. But when individuals want to trade because of heterogeneous beliefs, this standard argument is less compelling. We illustrate this in a standard general equilibrium setting and explore potential social benefits from restrictions on trade that make markets incomplete.

Original language	English (US)
Pages (from-to)	191-221
Number of pages	31
Journal	Journal of Economic Theory
Volume	178
DOIs	https://doi.org/10.1016/j.jet.2018.09.004
State	Published - Nov 2018

Keywords

Financial regulation
Heterogeneous beliefs
Incomplete markets
Social welfare
Speculation
Spurious unanimity

ASJC Scopus subject areas

Economics and Econometrics

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10.1016/j.jet.2018.09.004

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abstract = "If two rational agents want to trade and there are no externalities, then trade is Pareto improving. Economists generally oppose restrictions on such trade. Complete markets allocations are Pareto optimal and thus complete markets are generally viewed as good. But when individuals want to trade because of heterogeneous beliefs, this standard argument is less compelling. We illustrate this in a standard general equilibrium setting and explore potential social benefits from restrictions on trade that make markets incomplete.",

keywords = "Financial regulation, Heterogeneous beliefs, Incomplete markets, Social welfare, Speculation, Spurious unanimity",

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language = "English (US)",

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AU - Cogley, Timothy

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AU - Sargent, Thomas J.

AU - Tsyrennikov, Viktor

PY - 2018/11

Y1 - 2018/11

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AB - If two rational agents want to trade and there are no externalities, then trade is Pareto improving. Economists generally oppose restrictions on such trade. Complete markets allocations are Pareto optimal and thus complete markets are generally viewed as good. But when individuals want to trade because of heterogeneous beliefs, this standard argument is less compelling. We illustrate this in a standard general equilibrium setting and explore potential social benefits from restrictions on trade that make markets incomplete.

KW - Financial regulation

KW - Heterogeneous beliefs

KW - Incomplete markets

KW - Social welfare

KW - Speculation

KW - Spurious unanimity

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ER -

A case for incomplete markets

Abstract

Keywords

ASJC Scopus subject areas

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