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When Borch’s Theorem does not apply: some key implications of market incompleteness, with policy relevance today

Jacques Dreze

No 2013009, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Markets are incomplete when the assets available to the agents do not span the space of future contingencies. Efficiency is then assessed by the weak criterion of "constrained efficiency" (efficiency relative to the set of allocations compatible with the asset structure). That criterion requires firms to optimise relative to shadow-prices reflecting shareholders’ preferences. Yet, even when firms do so, competitive equilibria on the markets for assets and commodities fail (generically) to be constrained efficient (section 3). Pareto-superior allocations can be implemented through price/wage rigidities and quantity constraints (section 4). But nominal rigidities are conducive to multiple equilibria, implying endogenous macroeconomic uncertainties that compound the primitive (exogenous) uncertainties (section 5). Various policy implications can be drawn, which are of some relevance to the current crisis.

Keywords: general equilibrium; incomplete markets; temporary equilibrium; constrained efficiency; price rigidities; multiple equilibria; coordination failures; Phillips curve (search for similar items in EconPapers)
JEL-codes: D50 D52 D82 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mic
Date: 2013-04-26
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Journal Article: When Borch's Theorem Does Not Apply: Some Key Implications of Market Incompleteness, with Policy Relevance Today (2016) Downloads
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