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Are incomplete markets able to achieve minimal efficiency?

Author

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  • Egbert Dierker

  • Hildegard Dierker
  • Birgit Grodal

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 inefficient. In this paper, we weaken the concept of constrained efficiency 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 efficient. Copyright Springer-Verlag Berlin/Heidelberg 2005

Suggested Citation

  • Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2005. "Are incomplete markets able to achieve minimal efficiency?," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(1), pages 75-87, January.
    • Handle: RePEc:spr:joecth:v:25:y:2005:i:1:p:75-87
    DOI: 10.1007/s00199-003-0406-z
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    Cited by:

    1. Bejan, Camelia, 2008. "Production and financial decisions under uncertainty," MPRA Paper 11033, University Library of Munich, Germany.
    2. 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.
    3. Zierhut, Michael, 2019. "Nonexistence of constrained efficient production plans," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 127-136.
    4. Stefano Demichelis & Klaus Ritzberger, 2011. "A general equilibrium analysis of corporate control and the stock market," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 46(2), pages 221-254, February.
    5. Camelia Bejan, 2020. "Investment and financing in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 69(1), pages 149-182, February.
    6. Egbert Dierker, 2015. "A multiperiod Drèze rule," Economic Theory Bulletin, Springer;Society for the Advancement of Economic Theory (SAET), vol. 3(2), pages 129-151, October.
    7. Michael Zierhut, 2017. "Constrained efficiency versus unanimity in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 64(1), pages 23-45, June.

    More about this item

    Keywords

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    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G1 - Financial Economics - - General Financial Markets

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