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Completing Markets in a One-Good, Pure Exchange Economy Without State-Contingent Securities

  • David Eagle

    (Eastern Washington University)

Pareto-efficient consumption in a pure-exchange, one good economy varies over states of nature with respect to only two factors: real aggregate supply and individual utility shocks. One’s optimal contract receipts vary with respect to only these two factors and the ratio of one’s endowment to real aggregate supply. How one’s Pareto-efficient consumption varies with real aggregate supply depends solely on how one’s relative risk aversion compares to the average. Complete markets can be approximately achieved by four contracts dealing with these factors. This has implications concerning central banking, efficient insurance contract design, and a possible new financial innovation.

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File URL: http://econwpa.repec.org/eps/fin/papers/0501/0501009.pdf
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Paper provided by EconWPA in its series Finance with number 0501009.

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Length: 42 pages
Date of creation: 15 Jan 2005
Date of revision:
Handle: RePEc:wpa:wuwpfi:0501009
Note: Type of Document - pdf; pages: 42. Paper has policy implications concerning monetary policy and goals, insurance contract design, and optimal inflation indexing
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Viard, Alan D, 1993. "The Welfare Gain from the Introduction of Indexed Bonds," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 25(3), pages 612-28, August.
  2. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  3. David Eagle & Dale Domian, 2005. "Quasi-Real Indexing-- The Pareto-Efficient Solution to Inflation Indexing," Finance 0509017, EconWPA.
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