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General Equilibrium in a Labor-Managed Economy with Uncertainty and Incomplete Markets


  • Richard E. Kihlstrom

    (University of Pennsylvania)

  • Jean-Jacques Laffont

    (Universite des Sciences Sociales de Toulouse)


This paper studies the free entry competitive equilibria of a labor managed economy when there are less than complete contingent claims markets. First, we prove the existence of a simple labor management equilibrium which is inefficient in the Diamond sense. Second, we introduce an insurance system internal to the firm and show that the resulting equilibrium exists and is Diamond efficient. This insurance system plays for a labor managed economy the same role as fixed obligation debt markets in an entrepreneurial stock market equilibrium.

Suggested Citation

  • Richard E. Kihlstrom & Jean-Jacques Laffont, 2002. "General Equilibrium in a Labor-Managed Economy with Uncertainty and Incomplete Markets," Annals of Economics and Finance, Society for AEF, vol. 3(1), pages 185-217, May.
  • Handle: RePEc:cuf:journl:y:2002:v:3:i:1:p:185-217

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    References listed on IDEAS

    1. Steinar Ekern & Robert Wilson, 1974. "On the Theory of the Firm in an Economy with Incomplete Markets," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 171-180, Spring.
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    Cited by:

    1. Ping Yan, 2011. "Optimal Unemployment Insurance with Endogenous Search Effort," Annals of Economics and Finance, Society for AEF, vol. 12(2), pages 347-369, November.

    More about this item


    Labor-management; Uncertainty; Incomplete markets; General equilibrium;

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • J5 - Labor and Demographic Economics - - Labor-Management Relations, Trade Unions, and Collective Bargaining


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