Pooling and endogenous market incompleteness

Alessandro Citanna; Antonio Villanacci

doi:10.1007/s00199-004-0489-1

Pooling and endogenous market incompleteness

Alessandro Citanna, Antonio Villanacci

Economics

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

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.

Original language	English (US)
Pages (from-to)	549-560
Number of pages	12
Journal	Economic Theory
Volume	24
Issue number	3
DOIs	https://doi.org/10.1007/s00199-004-0489-1
State	Published - Oct 2004

Keywords

Endogenous asset formation
Financial pooling
Incomplete financial markets
Indeterminacy of equilibria

ASJC Scopus subject areas

Economics and Econometrics

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10.1007/s00199-004-0489-1

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AB - 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.

KW - Endogenous asset formation

KW - Financial pooling

KW - Incomplete financial markets

KW - Indeterminacy of equilibria

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Pooling and endogenous market incompleteness

Abstract

Keywords

ASJC Scopus subject areas

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