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Whither Capitalism? Financial Externalities and Crisis

In: The Global Macro Economy and Finance

Author

Listed:
  • Marcus Miller

    (University of Warwick)

  • Lei Zhang

    (University of Warwick)

Abstract

The Pareto-efficiency of competitive economic equilibrium is, of course, a central feature of the Arrow-Debreu paradigm. But in 1986 two papers appeared concerning the welfare inefficiency of competitive equilibria. Geanakoplos and Polemarchakis showed that ‘missing markets’ implied the possibility of Pareto-improving interventions; while Greenwald and Stiglitz demonstrated that missing markets and asymmetric information implied that competitive market prices could generate ‘pecuniary externalities’ — with market prices generating side-effects conceptually similar to technological externalities (such as the productive interactions of Silicon Valley or the negative effects of industrial pollution).

Suggested Citation

  • Marcus Miller & Lei Zhang, 2012. "Whither Capitalism? Financial Externalities and Crisis," International Economic Association Series, in: Franklin Allen & Masahiko Aoki & Jean-Paul Fitoussi & Nobuhiro Kiyotaki & Roger Gordon & Joseph E. S (ed.), The Global Macro Economy and Finance, chapter 7, pages 131-153, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-137-03425-0_8
    DOI: 10.1057/9781137034250_8
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