Welfare-improving financial innovation with a single good |
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Authors: | Ronel Elul |
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Institution: | (1) Department of Economics, Brown University, Providence, RI 02912, USA (e-mail: ronel_elul@brown.edu), US |
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Abstract: | Summary. We show that at any equilibrium of almost every single-good incomplete markets economy, it is possible to find an asset which
when introduced makes every agent better-off. Diamond (1967) has shown, however, that such economies are constrained suboptimal, so it is of course impossible to find a new asset which makes all agents worse-off. This contrasts with the case of multiple
consumption goods, for which Cass and Citanna (1995) and Elul (1995) demonstrate that equilibrium utilities may be arbitrarily
perturbed via financial innovation. Proving our result requires us to exploit not changes in equilibrium prices, but rather
the gains to trading the new asset. In particular, we find an asset which when introduced does not change the existing asset
prices even though it is traded by every agent – by a revealed preference argument it must therefore make everyone better-off.
Received: May 28, 1997; revised version: July 1, 1997 |
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Keywords: | JEL Classification Numbers: D52 D60 G10 |
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