A case for incomplete markets

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

    Research output: Contribution to journalArticle

    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 languageEnglish (US)
    Pages (from-to)191-221
    Number of pages31
    JournalJournal of Economic Theory
    Volume178
    DOIs
    StatePublished - 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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  • Cite this

    Blume, L. E., Cogley, T., Easley, D. A., Sargent, T. J., & Tsyrennikov, V. (2018). A case for incomplete markets. Journal of Economic Theory, 178, 191-221. https://doi.org/10.1016/j.jet.2018.09.004