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Pooling and endogenous market incompleteness

Abstract : We study a financial market economy with a continuum of borrowers and pooling of borrowersrsquo 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 borrowersrsquo no-arbitrage beliefs, we link expectations to the financial market structure. Markets are complete if and only if borrowersrsquo beliefs are homogeneous. Price-taking behavior causes a coordination problem which in turn yields indeterminacy and inefficiency of equilibrium allocations.
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Submitted on : Thursday, March 11, 2010 - 3:31:12 PM
Last modification on : Thursday, January 11, 2018 - 6:19:31 AM

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Alessandro Citanna, Antonio Villanacci. Pooling and endogenous market incompleteness. Economic Theory, Springer Verlag, 2004, Vol.24,n°3, pp.549-560. ⟨10.1007/s00199-004-0489-1⟩. ⟨hal-00463224⟩

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