Financial intermediation and the welfare theorems in incomplete markets

Bettzuege, Marc Oliver, Hens, Thorsten and Zierhut, Michael . Financial intermediation and the welfare theorems in incomplete markets. Econ. Theory. NEW YORK: SPRINGER. ISSN 1432-0479

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DOI:10.1007/s00199-020-01294-w

Abstract

In production economies with incomplete markets, shareholders disagree about the objective of the firm. We show that a weak financial intermediary, who is unable to complete markets, can offer just enough spanning to resolve this disagreement. The intermediary is limited to offering one customized contract per consumer. Knowledge of demand functions is sufficient for offering the right contracts. Once agreement among shareholders is reached, productive efficiency is restored, which in turn permits a Pareto efficient market outcome. This result shows that the first welfare theorem does not depend on complete spanning, but merely on institutions that provide the right span. However, this cannot be said about the second welfare theorem: For some wealth distributions, equilibria with transfers fail to exist due to nonconvexities caused by market incompleteness.

Item Type:

Journal Article

Creators:

Creators	Email	ORCID	ORCID Put Code
Bettzuege, Marc Oliver	UNSPECIFIED	UNSPECIFIED	UNSPECIFIED
Hens, Thorsten	UNSPECIFIED	UNSPECIFIED	UNSPECIFIED
Zierhut, Michael	UNSPECIFIED	UNSPECIFIED	UNSPECIFIED