Whither Capitalism? Financial Externalities and Crisis

Marcus Miller and Lei Zhang
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Lei Zhang: University of Warwick

Chapter 7 in The Global Macro Economy and Finance, 2012, pp 131-153 from Palgrave Macmillan

Abstract: Abstract The Pareto-efficiency of competitive economic equilibrium is, of course, a central feature of the Arrow-Debreu paradigm. But in 1986 two papers appeared concerning the welfare inefficiency of competitive equilibria. Geanakoplos and Polemarchakis showed that ‘missing markets’ implied the possibility of Pareto-improving interventions; while Greenwald and Stiglitz demonstrated that missing markets and asymmetric information implied that competitive market prices could generate ‘pecuniary externalities’ — with market prices generating side-effects conceptually similar to technological externalities (such as the productive interactions of Silicon Valley or the negative effects of industrial pollution).

Keywords: Asset Price; Risky Asset; Limited Liability; Financial Externality; Interbank Market (search for similar items in EconPapers)
Date: 2012
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DOI: 10.1057/9781137034250_8

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