We found a match
Your institution may have access to this item. Find your institution then sign in to continue.
- Title
NONEXISTENCE OF CONSTRAINED EFFICIENT EQUILIBRIA WHEN MARKETS ARE INCOMPLETE.
- Authors
Dierker, Egbert; Dierker, Hildegard; Grodal, Birgit
- Abstract
The article considers economies with incomplete markets, production, and private ownership of initial endowments and restricts it to one good per state. The existence of assets including equity contracts gives rise to the possibility of insuring against risk. However, since markets are incomplete, insurance remains partial and the production plan of a firm can very well affect the asset span, that is to say, the insurance possibilities. Thus, firms not only provide profits to their owners but also ways to transfer wealth across time and states. The article presents an example of an economy with privately owned endowments such that no market equilibrium with respect to fixed production decisions is constrained efficient. That is to say, all allocations that can be achieved by the market can be Pareto dominated by a planner who is not constrained by the given distribution of initial endowments. The article presents an example in a simple setting with constant returns to scale. Since firms do not exert market power, individual wealth is determined by initial endowments and the zero profit condition. As profits vanish and firms are assumed to serve the new owners, original ownership plays no role.
- Subjects
MARKETS; FINANCIAL management; ENDOWMENTS; EQUITY (Law); EDUCATION policy; MONEY
- Publication
Econometrica, 2002, Vol 70, Issue 3, p1245
- ISSN
0012-9682
- Publication type
Article
- DOI
10.1111/1468-0262.00326