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Predetermined Prices and the Allocation of Social Risks

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  • Costas Azariadis
  • Russell Cooper

Abstract

We propose a Walrasian explanation for the existence of fixed prices, i.e., of trades in which either the price or the quantity exchanged does not reflect all publicly available information. Such trades result in a rigid price system that facilitates the sharing of social risks; they may also cause allocative distortions that increase the equilibrium price of insurance above its actuarially fair level. We demonstrate that the market for noncontingent claims is active only when this insurance "gain" outweighs the "cost" of allocative distortions. Fixed price equilibria are constrained optima, i.e., they cannot be dominated by an appropriately constrained central planner.

Suggested Citation

  • Costas Azariadis & Russell Cooper, 1985. "Predetermined Prices and the Allocation of Social Risks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(2), pages 495-518.
    • Handle: RePEc:oup:qjecon:v:100:y:1985:i:2:p:495-518.
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    File URL: http://hdl.handle.net/10.2307/1885393
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    References listed on IDEAS

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    1. 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.
    2. Shell, Karl, 1971. "Notes on the Economics of Infinity," Journal of Political Economy, University of Chicago Press, vol. 79(5), pages 1002-1011, Sept.-Oct.
    3. Gale, David, 1973. "Pure exchange equilibrium of dynamic economic models," Journal of Economic Theory, Elsevier, vol. 6(1), pages 12-36, February.
    4. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
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    Cited by:

    1. Antoine Martin & Cyril Monnet, 2000. "When should labor contracts be nominal?," Working Papers 603, Federal Reserve Bank of Minneapolis.
    2. Guido Tabellini & Scott Freeman, 1998. "The optimality of nominal contracts," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 545-562.
    3. Russell Cooper, 1984. "Insurance, Flexibility and Non-contingent Trades," Cowles Foundation Discussion Papers 691, Cowles Foundation for Research in Economics, Yale University.
    4. Alexander L. Wolman, 2007. "The frequency and costs of individual price adjustment," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 28(6), pages 531-552.
    5. Jovanovic, Boyan & Ueda, Masako, 1998. "Stock-Returns and Inflation in a Principal-Agent Economy," Journal of Economic Theory, Elsevier, vol. 82(1), pages 223-247, September.

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