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Are Incomplete Markets Able to Achieve Minimal Efficiency?

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  • Egbert Dierker

    (University of Vienna)

  • Hildegard Dierker

    (University of Vienna)

  • Birgit Grodal

    (Institute of Economics, University of Copenhagen)

Abstract

We consider economies with incomplete markets, one good per state, two periods, t = 0; 1, private ownership of initial endowments, a single firm, and no assets other than shares in this firm. In Dierker, Dierker, Grodal (2002), we give an example of such an economy in which all market equilibria are constrained ineffcient. In this paper, we weaken the concept of constrained effciency by taking away the planner’s right to determine consumers’ investments. An allocation is called minimally constrained efficient if a planner, who can only determine the production plan and the distribution of consumption at t = 0, cannot find a Pareto improvement. We present an example with arbitrarily small income effects in which no market equilibrium is minimally constrained effcient.

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Bibliographic Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 03-09.

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Length: 13 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:kud:kuiedp:0309

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Keywords: incomplete markets with production; constrained efficiency; Drèze equilibria;

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References

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  1. Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2001. "Nonexistence of constrained Efficient Equilibria when Markets are Incomplete," Vienna Economics Papers 0111, University of Vienna, Department of Economics.
  2. Nicolas Gravel, 2001. "On the difficulty of combining actual and potential criteria for an increase in social welfare," Economic Theory, Springer, vol. 17(1), pages 163-180.
  3. Grossman, Sanford J., 1977. "A characterization of the optimality of equilibrium in incomplete markets," Journal of Economic Theory, Elsevier, vol. 15(1), pages 1-15, June.
  4. John Geanakoplos & Michael Magill & Martine Quinzii & J. Dreze, 1988. "Generic Inefficiency of Stock Market Equilibrium When Markets Are Incomplete," Cowles Foundation Discussion Papers 863, Cowles Foundation for Research in Economics, Yale University.
  5. DHILLON, Amrita & MERTENS, Jean-François, 1993. "Relative Utilitarianism," CORE Discussion Papers 1993048, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Cole, Harold L. & Prescott, Edward C., 1997. "Valuation Equilibrium with Clubs," Journal of Economic Theory, Elsevier, vol. 74(1), pages 19-39, May.
  7. Prescott, Edward C & Townsend, Robert M, 1984. "General Competitive Analysis in an Economy with Private Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(1), pages 1-20, February.
  8. Petra Geraats & Hans Haller, 1998. "Shareholders' choice," Journal of Economics, Springer, vol. 68(2), pages 111-135, June.
  9. DeMarzo, Peter M, 1993. "Majority Voting and Corporate Control: The Rule of the Dominant Shareholder," Review of Economic Studies, Wiley Blackwell, vol. 60(3), pages 713-34, July.
  10. Guesnerie, Roger, 1975. "Pareto Optimality in Non-Convex Economies," Econometrica, Econometric Society, vol. 43(1), pages 1-29, January.
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Cited by:
  1. Dierker, Egbert & Dierker, Hildegard, 2010. "Welfare and efficiency in incomplete market economies with a single firm," Journal of Mathematical Economics, Elsevier, vol. 46(5), pages 652-665, September.
  2. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer, vol. 46(2), pages 221-254, February.
  3. Bejan, Camelia, 2008. "Production and financial decisions under uncertainty," MPRA Paper 11033, University Library of Munich, Germany.

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