A simple model of privately profitable but socially useless speculation

Murray Kemp and Hans-Werner Sinn

Munich Reprints in Economics from University of Munich, Department of Economics

Abstract: The paper presents a general equilibrium model of a pure exchange economy with stochastic endowments, in which speculation in the forward market is profitable and stabilizes prices but is useless from a welfare point of view. Reconciling the Siegel paradox with the theory of incomplete markets, we show that banning speculation by closing the forward market may increase social welfare. We also show that the addition of a market might reduce the gains from international trade for all participating countries. JEL Classification Numbers: F10, F11, F19.

Date: 2000
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Published in Japanese Economic Review 1 51(2000): pp. 84-94

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Journal Article: A Simple Model of Privately Profitable But Socially Useless Speculation (2000)
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