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. Copyright Springer-Verlag Berlin/Heidelberg 2004
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Article provided by Springer in its journal Economic Theory.
Volume (Year): 24 (2004) Issue (Month): 3 (October) Pages: 549-560 Download reference. The following formats are available: HTML
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