Information revelation and market incompleteness

Jose Marin () and Rohit Rahi ()

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: \documentstyle[portada,11pt]{article} This paper shows that the presence of private information in an economy can be a source of market incompleteness even when it is feasible to issue a set of securities that completely eliminates the informational asymmetries in equilibrium. We analyze a simple security design model in which a volume maximizing futures exchange chooses not only the characteristics of each individual contract but also the number of contracts. Agents have rational expectations and differ in information, endowments and, possibly, attitudes toward risk. The emergence of complete or incomplete markets in equilibrium depends on whether the {\it adverse selection effect} is stronger or weaker than the {\it Hirshleifer effect}, as new securities are issued and prices reveal more information. When the Hirshleifer effect dominates, the exchange chooses an incomplete set of financial contracts, and the equilibrium price is partially revealing.

Keywords: Incomplete markets; welfare; futures contracts; information revelation (search for similar items in EconPapers)
JEL-codes: D52 D82 G14 (search for similar items in EconPapers)
Date: 1996-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: Information Revelation and Market Incompleteness (2000)
Working Paper: Information Revelation and Market Incompleteness (1996)
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:145

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