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Journal Articles Economic Theory Year : 2004

Pooling and endogenous market incompleteness

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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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hal-00463224 , version 1 (11-03-2010)

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

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