Pooling and endogenous market incompleteness

Alessandro Citanna, Antonio Villanacci

Research output: Contribution to journalArticle

Abstract

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

Original languageEnglish (US)
Pages (from-to)549-560
Number of pages12
JournalEconomic Theory
Volume24
Issue number3
DOIs
StatePublished - Oct 1 2004

Fingerprint

Pooling
Market incompleteness
Financial markets
Price-taking
Coordination problems
Market economy
Indeterminacy
No-arbitrage
Inefficiency
Cost-utility
Market structure

Keywords

  • Endogenous asset formation
  • Financial pooling
  • Incomplete financial markets
  • Indeterminacy of equilibria

ASJC Scopus subject areas

  • Economics and Econometrics

Cite this

Pooling and endogenous market incompleteness. / Citanna, Alessandro; Villanacci, Antonio.

In: Economic Theory, Vol. 24, No. 3, 01.10.2004, p. 549-560.

Research output: Contribution to journalArticle

Citanna, Alessandro ; Villanacci, Antonio. / Pooling and endogenous market incompleteness. In: Economic Theory. 2004 ; Vol. 24, No. 3. pp. 549-560.
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