Pooling and endogenous market incompleteness

Alessandro Citanna () and Antonio Villanacci
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Alessandro Citanna: GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique

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Abstract: We study a financial market economy with a continuum of borrowers and pooling of borrowersrsquo 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 borrowersrsquo no-arbitrage beliefs, we link expectations to the financial market structure. Markets are complete if and only if borrowersrsquo beliefs are homogeneous. Price-taking behavior causes a coordination problem which in turn yields indeterminacy and inefficiency of equilibrium allocations.

Keywords: Incomplete financial markets; Endogenous asset formation; Financial pooling; Indeterminacy of equilibria (search for similar items in EconPapers)
Date: 2004-10-01
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Published in Economic Theory, 2004, Vol.24,n°3, pp.549-560. ⟨10.1007/s00199-004-0489-1⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-00463224

DOI: 10.1007/s00199-004-0489-1

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