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General equilibrium and endogenous creation of asset markets

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  • Faias, Marta

Abstract

This paper studies a class of general equilibrium economies in which asset markets arise as choice of /nancial intermediaries. The economy is modeled as a two stage game as in Bisin[8]. In the /rst stage intermediaries set up the /nancial structure according to the expectation that they have for the sec- ond stage outcome. In the second stage, consumers behave as price takers in the commodity market and in the previously created assets market. We consider that intermediaries form their expectations using continuous random selections from the second stage equilibrium correspondence (di.erently from Bisin [8] where an endogenous beliefs expectation was used). We establish the existence of equilibria in mixed strategies and moreover, we obtain an approximate equilibria in pure strategies by modeling explicitly the incomplete information that each intermediary has about others intermediaries /xed cost functions.

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Bibliographic Info

Paper provided by Universidade Nova de Lisboa, Faculdade de Economia in its series FEUNL Working Paper Series with number wp454.

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Length: 31 pages
Date of creation: 2004
Date of revision:
Handle: RePEc:unl:unlfep:wp454

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Keywords: Endogenous asset creation; asset design game; strategic intermediaries; continuous random selections; puri/cation of equilibria;

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  1. Wolfgang Pesendorfer, 1991. "Financial Innovation in a General Equilibrium Model," UCLA Economics Working Papers 635, UCLA Department of Economics.
  2. Franklin Allen & Douglas Gale, . "Optimal Security Design," Rodney L. White Center for Financial Research Working Papers 26-87, Wharton School Rodney L. White Center for Financial Research.
  3. 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.
  4. Demange, G. & Laroque, G., 1992. "Private Information and the Design of Securities," DELTA Working Papers 92-22, DELTA (Ecole normale supérieure).
  5. Paul Milgrom & Robert Weber, 1981. "Distributional Strategies for Games with Incomplete Information," Discussion Papers 428R, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. Debreu,Gerard Introduction by-Name:Hildenbrand,Werner, 1986. "Mathematical Economics," Cambridge Books, Cambridge University Press, number 9780521335614, April.
  7. Faias, Marta & Moreno-Garcia, Emma & Pascoa, Mario Rui, 2002. "Real indeterminacy of equilibria and manipulability," Journal of Mathematical Economics, Elsevier, vol. 37(4), pages 325-340, July.
  8. Leo K. Simon and William R. Zame., 1987. "Discontinuous Games and Endogenous Sharing Rules," Economics Working Papers 8756, University of California at Berkeley.
  9. Allen, Beth, 1994. "Randomization and the limit points of monopolistic competition," Journal of Mathematical Economics, Elsevier, vol. 23(3), pages 205-218, May.
  10. Luis Braido, 2005. "General equilibrium with endogenous securities and moral hazard," Economic Theory, Springer, vol. 26(1), pages 85-101, 07.
  11. Hara Chiaki, 1995. "Commission-Revenue Maximization in a General Equilibrium Model of Asset Creation," Journal of Economic Theory, Elsevier, vol. 65(1), pages 258-298, February.
  12. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
  13. Mas-Colell, Andreu & Nachbar, John H., 1991. "On the finiteness of the number of critical equilibria, with an application to random selections," Journal of Mathematical Economics, Elsevier, vol. 20(4), pages 397-409.
  14. Stahn, Hubert, 1998. "On monopolistic equilibria with incomplete markets: the case of an exchange economy," Journal of Mathematical Economics, Elsevier, vol. 29(1), pages 83-107, January.
  15. 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.
  16. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  17. Geanakoplos, John & Mas-Colell, Andreu, 1989. "Real indeterminacy with financial assets," Journal of Economic Theory, Elsevier, vol. 47(1), pages 22-38, February.
  18. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June.
  19. Geanakoplos, John, 1990. "An introduction to general equilibrium with incomplete asset markets," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 1-38.
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