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Information revelation and market incompleteness

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  • José M. Marín
  • Rohit Rahi

Abstract

\documentstyle[portada,11pt]{article} This paper shows that the presence of private information in an economy can be a source of market incompleteness even when it is feasible to issue a set of securities that completely eliminates the informational asymmetries in equilibrium. We analyze a simple security design model in which a volume maximizing futures exchange chooses not only the characteristics of each individual contract but also the number of contracts. Agents have rational expectations and differ in information, endowments and, possibly, attitudes toward risk. The emergence of complete or incomplete markets in equilibrium depends on whether the {\it adverse selection effect} is stronger or weaker than the {\it Hirshleifer effect}, as new securities are issued and prices reveal more information. When the Hirshleifer effect dominates, the exchange chooses an incomplete set of financial contracts, and the equilibrium price is partially revealing.

Suggested Citation

  • José M. Marín & Rohit Rahi, 1996. "Information revelation and market incompleteness," Economics Working Papers 145, Department of Economics and Business, Universitat Pompeu Fabra.
  • Handle: RePEc:upf:upfgen:145
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    References listed on IDEAS

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    More about this item

    Keywords

    Incomplete markets; welfare; futures contracts; information revelation;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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