A case for incomplete markets

If two rational agents want to trade and there are no externalities, then trade is Pareto improving. Economists generally oppose restrictions on such trade. Complete markets allocations are Pareto optimal and thus complete markets are generally viewed as good. But when individuals want to trade beca...

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Bibliographic Details
Published in:Journal of economic theory 2018-11, Vol.178, p.191-221
Main Authors: Blume, Lawrence E., Cogley, Timothy, Easley, David A., Sargent, Thomas J., Tsyrennikov, Viktor
Format: Article
Language:English
Subjects:
Financial regulation
Heterogeneous beliefs
Incomplete markets
Social welfare
Speculation
Spurious unanimity
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Summary:If two rational agents want to trade and there are no externalities, then trade is Pareto improving. Economists generally oppose restrictions on such trade. Complete markets allocations are Pareto optimal and thus complete markets are generally viewed as good. But when individuals want to trade because of heterogeneous beliefs, this standard argument is less compelling. We illustrate this in a standard general equilibrium setting and explore potential social benefits from restrictions on trade that make markets incomplete.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2018.09.004