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A Case for Incomplete Markets

Author

Listed:
  • Blume, Lawrence E.

    (Cornell University and Institute for Advanced Studies)

  • Cogley, Timothy

    (New York University)

  • Easley, David A.

    (Cornell University)

  • Sargent, Thomas J.

    (New York University and Hoover Institution)

  • Tsyrennikov, Viktor

    (IMF)

Abstract

We propose a new welfare criterion that allows us to rank alternative financial market structures in the presence of belief heterogeneity. We analyze economies with complete and incomplete financial markets and/or restricted trading possibilities in the form of borrowing limits or transaction costs. We describe circumstances under which various restrictions on financial markets are desirable according to our welfare criterion.

Suggested Citation

  • Blume, Lawrence E. & Cogley, Timothy & Easley, David A. & Sargent, Thomas J. & Tsyrennikov, Viktor, 2015. "A Case for Incomplete Markets," Economics Series 313, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:313
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-313.pdf
    File Function: First version, 2015
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    References listed on IDEAS

    as
    1. Morris, Stephen, 1995. "The Common Prior Assumption in Economic Theory," Economics and Philosophy, Cambridge University Press, vol. 11(02), pages 227-253, October.
    2. Timothy Cogley & Thomas J. Sargent & Viktor Tsyrennikov, 2014. "Wealth Dynamics in a Bond Economy with Heterogeneous Beliefs," Economic Journal, Royal Economic Society, vol. 124(575), pages 1-30, March.
    3. Darrell Duffie, 2014. "Challenges to a Policy Treatment of Speculative Trading Motivated by Differences in Beliefs," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 173-182.
    4. Edi Karni & Philippe Mongin, 2000. "On the Determination of Subjective Probability by Choices," Management Science, INFORMS, vol. 46(2), pages 233-248, February.
    5. Jaroslav Borovicka, 2009. "Heterogeneous beliefs under recursive preferences," 2009 Meeting Papers 892, Society for Economic Dynamics.
    6. Viktor Tsyrennikov, 2012. "Heterogeneous Beliefs, Wealth Distribution, and Asset Markets with Risk of Default," American Economic Review, American Economic Association, vol. 102(3), pages 156-160, May.
    7. Lawrence Blume & David Easley, 2006. "If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Econometrica, Econometric Society, vol. 74(4), pages 929-966, July.
    8. Itzhak Gilboa & Larry Samuelson & David Schmeidler, 2014. "No‐Betting‐Pareto Dominance," Econometrica, Econometric Society, vol. 82(4), pages 1405-1442, July.
    9. Stigler, George J & Becker, Gary S, 1977. "De Gustibus Non Est Disputandum," American Economic Review, American Economic Association, vol. 67(2), pages 76-90, March.
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    Citations

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    Cited by:

    1. Patrick Beissner & Frank Riedel, 2016. "Knight--Walras Equilibria," Papers 1605.04385, arXiv.org.
    2. Buss, Adrian & Dumas, Bernard & Uppal, Raman & Vilkov, Grigory, 2016. "The intended and unintended consequences of financial-market regulations: A general-equilibrium analysis," Journal of Monetary Economics, Elsevier, vol. 81(C), pages 25-43.
    3. Mongin, Philippe & Pivato, Marcus, 2016. "Social preference under twofold uncertainty," MPRA Paper 71776, University Library of Munich, Germany.
    4. Takashi Hayashi & Michele Lombardi, 2016. "Social decision under uncertainty and responsibility for beliefs," Working Papers 2016_19, Business School - Economics, University of Glasgow.
    5. repec:eee:eecrev:v:101:y:2018:i:c:p:133-141 is not listed on IDEAS
    6. Crès, Hervé & Tvede, Mich, 2018. "Regulation of trades based on differences in beliefs," European Economic Review, Elsevier, vol. 101(C), pages 133-141.
    7. Maurizio MOTOLESE & NAKATA Hiroyuki, 2016. "Endogenous Fluctuations and Social Welfare under Credit Constraints and Heterogeneous Beliefs," Discussion papers 16082, Research Institute of Economy, Trade and Industry (RIETI).

    More about this item

    Keywords

    social welfare; heterogeneous beliefs; spurious unanimity; speculation; pessimism; incomplete markets; financial regulation;

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