Restricted Participation

Following [29], we can say that “While there might be some disagreement over whether, in a modern developed economy, financial markets are actually incomplete, there can hardly be any disagreement over whether at least some economic agents are variously constrained in transacting on those financial markets. Without attempting a detailed explanation of how particular constraints come about (for example, in order to resolve problems arising from moral hazard), it is still possible to extend the model of Section 21 to incorporate, in a very general way, their implication for financial equilibrium by adding a restriction of the form $$ {b_h} \in {B_h} \subseteq {\mathbb{R}^I} $$ to problem (1)2. Here B h represents the portfolio set,the possible credit transactions available to the household”3. The above model of “restricted participation constitutes a bona fide generalization of the mode with incomplete markets, but the latter potentially embodies far more intersting institutional features (and not just the flavor of restricted participation) since it permits, for instance, modeling short sales bounds or market margin requirements. Of course, in principle such constraints should themselves be determined endogenously”4.