A Case for Incomplete Markets
Larry Blume (Cornell University and IHS)
The First Welfare Theorem in economies with heterogeneous beliefs states that competitive equilibria are (under the usual assumptions) ex ante optimal. Is the Pareto criterion useful in such economies? Our answer is "no''. We explain why the Pareto criterion gives intuitively bad answers to welfare questions, and show how in such economies trading restrictions of various kinds give welfare improvements according to several more sensible welfare criteria. paper jointly with Tim Cogley, David Easley, Thomas Sargent and Viktor Tsyrrenikov and
The Curse of Poverty and the Blessings of Wealth
Klaus Ritzberger (IHS and VGSF)
If productivity in a society is low, then the only equilibrium involves inefficiently selfish (autarkic) behavior. If productivity is sufficiently high, then there are several equilibria that realize substantial welfare gains through reciprocal behavior. Equilibria for productive societies are distinguished by how they treat the wealth distribution. While conservative societies preserve the distribution, egalitarian behavior further improves welfare by transfers. Yet, both conservative and egalitarian (productive) societies exclude the poorest, even though that involves a welfare loss. So, there are a social and an individual poverty trap. The first is technological, the second behavioral. paper jointly with Larry Blume