Pooling and endogenous market incompleteness

Alessandro Citanna () and Antonio Villanacci ()

Economic Theory, 2004, vol. 24, issue 3, 549-560

Abstract: We study a financial market economy with a continuum of borrowers and pooling of borrowers’ promises. Under these conditions and in the absence of designing costs, utility-maximizing decisions of price-taking borrowers may lead to financial market incompleteness. Parametrizing equilibria through the borrowers’ no-arbitrage beliefs, we link expectations to the financial market structure. Markets are complete if and only if borrowers’ beliefs are homogeneous. Price-taking behavior causes a coordination problem which in turn yields indeterminacy and inefficiency of equilibrium allocations. Copyright Springer-Verlag Berlin/Heidelberg 2004

Keywords: Incomplete financial markets; Endogenous asset formation; Financial pooling; Indeterminacy of equilibria. (search for similar items in EconPapers)
Date: 2004
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DOI: 10.1007/s00199-004-0489-1

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