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Pareto Improvement and Agenda Control of Sequential Financial Innovations

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  • Chiaki Hara

    (Institute of Economic Research, Kyoto University)

Abstract

In an exchange economy under uncertainty with two periods, one physical good, and finitely many states of the world, we show that for every (complete or incomplete) market span there exists a sequence of securities such that if they are introduced into markets one by one, the prices of any security is not affected by the subsequent introduction of newer securities and they together generate the given market span. Since these securities generate no pecuniary externalities, this result implies that every stage of such sequential financial innovations is Pareto-improving. Its implications on financial innovations via voting are also explored.

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Bibliographic Info

Paper provided by Kyoto University, Institute of Economic Research in its series KIER Working Papers with number 748.

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Length: 22pages
Date of creation: Dec 2010
Date of revision:
Handle: RePEc:kyo:wpaper:748

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Keywords: General equilibrium theory of incomplete security markets; financial innovation; Pareto improvement; agenda control; Nash equilibrium; subgame perfect equilibrium.;

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  1. Rohit Rahi & Jean-Pierre Zigrand, 2004. "Strategic financial innovation in segmented markets," LSE Research Online Documents on Economics 24785, London School of Economics and Political Science, LSE Library.
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