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When Borch’s Theorem does not apply: some key implications of market incompleteness, with policy relevance today

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  • DREZE, Jacques

    ()
    (Université catholique de Louvain, CORE, Belgium)

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    Abstract

    Markets are incomplete when the assets available to the agents do not span the space of future contingencies. Efficiency is then assessed by the weak criterion of "constrained efficiency" (efficiency relative to the set of allocations compatible with the asset structure). That criterion requires firms to optimise relative to shadow-prices reflecting shareholders’ preferences. Yet, even when firms do so, competitive equilibria on the markets for assets and commodities fail (generically) to be constrained efficient (section 3). Pareto-superior allocations can be implemented through price/wage rigidities and quantity constraints (section 4). But nominal rigidities are conducive to multiple equilibria, implying endogenous macroeconomic uncertainties that compound the primitive (exogenous) uncertainties (section 5). Various policy implications can be drawn, which are of some relevance to the current crisis.

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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2013009.

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    Date of creation: 26 Apr 2013
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    Handle: RePEc:cor:louvco:2013009

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    Related research

    Keywords: general equilibrium; incomplete markets; temporary equilibrium; constrained efficiency; price rigidities; multiple equilibria; coordination failures; Phillips curve;

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