Pooling and endogenous market incompleteness

A. CITANNA, A. Villanacci

Economic Theory

octobre 2004, vol. 24, n°3, pp.549-561

Départements : Economie et Sciences de la décision

Mots clés : Incomplete financial markets, Endogenous asset formation, Financial pooling, Indeterminacy of equilibria

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