Pareto improving financial innovation in incomplete markets

Cass, David; Citanna, Alessandro

doi:10.1007/s001990050198

Cited by 100 publications

(98 citation statements)

References 5 publications

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“…Hart (1974) shows that with incomplete markets, the introduction of a new market can lead to a Pareto reduction in welfare. Since then a number of authors have shown that financial innovation can be bad for welfare (see, e.g., Newbery and Stiglitz, 1982;Allen and Gale, 1990;Elul, 1995;and Cass and Citanna, 1998). The most closely related paper in this context is Du ee and Zhou (2001).…”

Section: Introductionmentioning

confidence: 99%

Credit risk transfer and contagion

Allen

Carletti²

2006

Journal of Monetary Economics

310

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Section: Introductionmentioning

confidence: 99%

Credit risk transfer and contagion

Allen

Carletti²

2006

Journal of Monetary Economics

310

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“…Geanakoplos and Polemarchakis (1986) show that competitive equilibria are typically constrained suboptimal, by showing that Pareto improvements can be obtained by making the appropriate redistributions in households' initial asset portfolios and next restricting all trade in asset markets. More recently, similar results have been obtained that show the possibility of generating Pareto improvements by introducing new financial assets, see Cass andCitanna (1998), or Citanna et al (1998) for a more general perspective, and the possibility of generating Pareto improvements by price regulation, see Polemarchakis (1979); Drèze and Gollier (1993); Drèze (2001), and Herings and Polemarchakis (2005).…”

Section: Introductionmentioning

confidence: 58%

Constrained suboptimality when prices are non-competitive

Herings

Konovalov

2009

Journal of Mathematical Economics

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a b s t r a c tThe paper addresses the following question: how efficient is the market system in allocating resources if trade takes place at prices that are not competitive? Even though there are many partial answers to this question, an answer that stands comparison to the rigor by which the first and second welfare theorems are derived is lacking. We first prove a "Folk Theorem" on the generic suboptimality of equilibria at non-competitive prices. The more interesting problem is whether equilibria are constrained optimal, i.e. efficient relative to all allocations that are consistent with prices at which trade takes place. We discuss an optimality notion due to Bénassy, and argue that this notion admits no general conclusions. We then turn to the notion of p-optimality and give a necessary condition, called the separating property, for constrained optimality: each constrained household should be constrained in each constrained market. If the number of commodities is less than or equal to two, the case usually treated in the textbook, then this necessary condition is also sufficient. In that case equilibria are constrained optimal. When there are three or more commodities, two or more constrained households, and two or more constrained markets, this necessary condition is typically not sufficient and equilibria are generically constrained suboptimal.

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“…The case of nonseparability (time and state) is easier to deal with, and follows from the proofs given See Elul (1997), whose robustness conditions can be simpli¯ed using our framework. 4 Contrary to Cass and Citanna (1998), robustness can be shown here also in the case when C = 1; but the equations considered are slightly di®erent, and we do not give the computational details in this paper.…”

Section: The Modelmentioning

confidence: 92%

“…Technically, this paper extends to a multiperiod setting the di®erential framework developed in Cass and Citanna (1998) to study¯nancial innovation in incomplete markets, itself a rami¯cation of the long-debated issue of constrained suboptimality (see Citanna, Kajii and Villanacci (1998)). We believe that the study of the e®ects of¯nancial innovation cannot be reduced to welfare comparisons, already addressed in the literature (see Cass and Citanna, (1998), or Elul, (1995), for example). We study the e®ects of innovation on price volatility, which cannot be de¯ned in the standard two-period exchange economy.…”

mentioning

confidence: 96%