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Are Sunspots Inevitable?

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  • Christophe Prechac
  • Aditya Goenka

Abstract

This paper examines the welfare of consumers in an incomplete markets economy with extrinsic uncertainty. It is shown that the utility of one consumer may be minimized at the Walrasian allocation relative to all other equilibrium allocations for a given security structure. Thus, this consumer will have no incentive to trade the new securities if they complete the insurance markets.

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File URL: http://repec.org/esFEAM04/up.3694.1082347741.pdf
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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 786.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:786

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Related research

Keywords: Sunspot equilibrium; incomplete markets; financial innovation; welfare analysis.;

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References

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  1. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  2. Ronel Elul, 1999. "Welfare-improving financial innovation with a single good," Economic Theory, Springer, vol. 13(1), pages 25-40.
  3. Balasko, Yves, 1983. "Extrinsic uncertainty revisited," Journal of Economic Theory, Elsevier, vol. 31(2), pages 203-210, December.
  4. Elul Ronel, 1995. "Welfare Effects of Financial Innovation in Incomplete Markets Economies with Several Consumption Goods," Journal of Economic Theory, Elsevier, vol. 65(1), pages 43-78, February.
  5. Duffie Darrell & Rahi Rohit, 1995. "Financial Market Innovation and Security Design: An Introduction," Journal of Economic Theory, Elsevier, vol. 65(1), pages 1-42, February.
  6. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-62, January.
  7. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
  8. David Cass & Alessandro Citanna, 1998. "Pareto improving financial innovation in incomplete markets," Economic Theory, Springer, vol. 11(3), pages 467-494.
  9. Karl Shell & Aditya Goenka, 1996. "When sunspots don't matter (*)," Economic Theory, Springer, vol. 9(1), pages 169-178.
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