In economics, incomplete markets are markets in which there does not exist an Arrow–Debreu security for every possible state of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transferring the desired level of wealth among states.
An Arrow security purchased or sold at date t is a contract promising to deliver one unit of income in one of the possible contingencies which can occur at date t + 1. If at each date-event there exists a complete set of such contracts, one for each contingency that can occur at the following date, individuals will trade these contracts in order to insure against future risks, targeting a desirable and budget feasible level of consumption in each state (i.e. consumption smoothing). In most set ups when these contracts are not available, optimal risk sharing between agents will not be possible. For this scenario, agents (homeowners, workers, firms, investors, etc.) will lack the instruments to insure against future risks such as employment status, health, labor income, prices, among others.
In a competitive market, each agent makes intertemporal choices in a stochastic environment. Their attitudes toward risk, the production possibility set, and the set of available trades determine the equilibrium quantities and prices of assets that are traded. In an "idealized" representation agents are assumed to have costless contractual enforcement and perfect knowledge of future states and their likelihood. With a complete set of state contingent claims (also known as Arrow–Debreu securities) agents can trade these securities to hedge against undesirable or bad outcomes.
When a market is incomplete, it typically fails to make the optimal allocation of assets. That is, the First Welfare Theorem no longer holds. The competitive equilibrium in an Incomplete Market is generally constrained suboptimal. The notion of constrained suboptimality was formalized by Geanakoplos and Polemarchakis (1986).
This page is automatically generated and may contain information that is not correct, complete, up-to-date, or relevant to your search query. The same applies to every other page on this website. Please make sure to verify the information with EPFL's official sources.
In economics, a market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services (including labour power) to buyers in exchange for money. It can be said that a market is the process by which the prices of goods and services are established. Markets facilitate trade and enable the distribution and allocation of resources in a society.
This course provides an overview of the theory of asset pricing and portfolio choice theory following historical developments in the field and putting
emphasis on theoretical models that help our unde
This course provides an advanced introduction to the methods and results of continuous time asset pricing
This course provides students with a working knowledge of macroeconomic models that explicitly incorporate financial markets. The goal is to develop a broad and analytical framework for analyzing the
A plethora of real world problems consist of a number of agents that interact, learn, cooperate, coordinate, and compete with others in ever more complex environments. Examples include autonomous vehicles, robotic agents, intelligent infrastructure, IoT de ...
EPFL2022
, ,
Traditional competitive markets do not account for negative externalities; indirect costs that some participants impose on others, such as the cost of over-appropriating a common-pool resource (which diminishes future stock, and thus harvest, for everyone) ...
Cornell University2023
,
Mapping the technology landscape is crucial for market actors to take informed investment decisions. However, given the large amount of data on the Web and its subsequent information overload, manually retrieving information is a seemingly ineffective and ...