Inefficiency of competitive equilibrium with hidden action and financial markets
In this paper, we study a pure exchange economy with idiosyncratic uncertainty, hidden action and multiple consumption goods.We consider two different market structures: contingent markets on the one hand, and financial and spot markets on the otherhand. We propose a competitive equilibrium concept for each market structure. We show that the equilibrium with contin-gent markets is efficient in an appropriate sense, while the equilibrium with financial and spot markets is inefficient, provided that assumptions on preferences more general than those usually considered in the literature hold.
|Date of creation:||00 Oct 2006|
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