Incomplete markets
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The Theory of Incomplete Markets is an extension of the general equilibrium approach to intertemporal economies with uncertainty, where the set of available contracts which can be used to transfer wealth across time is limited relative to the possible probabilistic states that an economy might find itself in. Unlike in the standard Arrow-Debreu model where all trade takes place at beginning of time, in an economy with incomplete markets agents trade in sequential spot markets.
There are at least two results that significantly depart from those well-known results in complete markets.
- Generic Existence of Equilibrium
- Non Pareto-Optimality of Allocations
The First Welfare Theorem concerning the Pareto Optimality of general equilibrium no longer holds.
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