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dc.contributor.authorCASS, David
dc.contributor.authorCITANNA, Alessandro
dc.identifier.citationEconomic Theory, 1998, 11, 3, 467-494
dc.description.abstractIn this paper we develop a differential technique for investigating the welfare effects of financial innovation in incomplete markets. Utilizing this technique, and after parametrizing the standard competitive, pure-exchange economy by both endowments and utility functions, we establish the following (weakly) generic property: Let S be the number of states, I be the number of assets and H be the number of households, and consider a particular financial equilibrium. Then, provided that the degree of market incompleteness is sufficiently larger than the extent of household heterogeneity, S - I greater than or equal to 2H -1 [resp. S - I greater than or equal to H + 1], there is an open set of single assets [resp. pairs of assets] whose introduction can make every household better off land, symmetrically, an open set of single assets [resp. pairs of assets] whose introduction can make them all worse off). We also devise a very simple nonparametric procedure for reducing extensive household heterogeneity to manageable size, a procedure which not only makes our restrictions on market incompleteness more palatable, but could also prove to be quite useful in other applications involving smooth analysis.
dc.titlePareto Improving Financial Innovation in Incomplete Markets

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