Uncertainty and Insurance in Strategic Market Games

Sonia Weyers
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Sonia Weyers: Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium

No 1996031, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: In perfectly competitive economies under uncertainty, there is a well-known equivalence between a formulation with contingent goods and a formulation with state- specific securities followed by spot markets for goods. In this paper, I examine whether this equivalence carries over in a particular context of imperfect competition, strategic market games the Shapley-Shubik way. In that context, I look at hree games. One with contingent commodities, one with Arrow securities traded under imperfect competition and one with Arrow securities traded under perfect competition. First I show that these three games are (almost) payoff-equivalent. Then I compare their equilibrium sets. The first result is that if the securities markets follow the same imperfectly competitive rules of price formation as the goods markets, then the only common equilibria between the contingent markets formulation and the securities formulation are those which involve no transfer of income across states. This result was already obtained by Peck and Shell. The second result is that if the securities markets are competitive and all open, then the set of equilibria of the contingent markets formulation and the securities formulation coincide.

Date: 1996-06-01
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