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Pooling and endogenous market incompleteness

Author

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  • Alessandro Citanna
  • Antonio Villanacci

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. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Alessandro Citanna & Antonio Villanacci, 2004. "Pooling and endogenous market incompleteness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(3), pages 549-560, October.
    • Handle: RePEc:spr:joecth:v:24:y:2004:i:3:p:549-560
    DOI: 10.1007/s00199-004-0489-1
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    Citations

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    Cited by:

    1. Jacques Drèze & Enrico Minelli & Mario Tirelli, 2008. "Production and financial policies under asymmetric information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(2), pages 217-231, May.
    2. repec:hal:spmain:info:hdl:2441/10284 is not listed on IDEAS
    3. Hervé Crès & Mich Tvede, 2001. "Proxy fights in incomplete markets: when majority voting and sidepayments are equivalent," Sciences Po publications 726/2001, Sciences Po.
    4. Hervé Crès, 2000. "Majority Stable Production Equilibria: A Multivariate Mean Shareholders Theorem," Sciences Po publications 706/2000, Sciences Po.
    5. repec:hal:spmain:info:hdl:2441/10282 is not listed on IDEAS

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