Theory of Incomplete Markets, Volume 1
The Theory of Incomplete Markets provides a unified framework for analyzing the real, financial, and monetary sectors of an economy. It describes an innovative theory that takes into account the fact that in order to coordinate their activities and share their risks, agents are forced by the imperfections in their knowledge and their propensity for opportunistic behavior to trade sequentially and to make only limited contractual commitments into the future. This book studies the consequences of trading with such a sequential and incomplete market structure for the equilibria of an economy: competitive markets no longer provide the ideal way of allocating resources and even with rational expectations monetary policy is nonneutral.The theory presented in this book retains the simplicity, coherence, and generality that are the hallmarks of traditional general equilibrium theory, while moving the nature of the markets, contracts, and constraints on agent participation into closer conformity with the actual structure of markets observed in the real world.Students and researchers will appreciate how the book incorporates results from the latest research while remaining accessible to a wide audience. The theory is built from the bottom up, with ample nontechnical motivation and a user-friendly presentation that constantly draws on the reader's economic and geometric intuition. Historical discussions in each chapter help clarify the origins and current limitations of the theory.This is the first of two volumes. Volume 1 focuses on the role and functioning of financial markets in a competitive setting. Volume 2 will study more general models that combine the real and financial sectors of the economy and depart from a purely competitive analysis. In addition to providing basic insights needed to understand the theory of incomplete markets, this volume provides the essential tools needed to understand the more general analysis of Volume 2.
About the Authors
Michael Magill is Professor of Economics at the University of Southern California.
Martine Quinzii is Professor of Economics at the University of California, Davis.
—Michael Woodford, Professor of Economics, Princeton University
—J. Darrell Duffie, Professor of Finance, Graduate School of Business, Stanford University
—Kenneth J. Arrow, John Kenney Professor of Economics, Emeritus, and Professor of Operations Research, Emeritus, Department of Economics, Stanford University
—Gerard Debreu, Professor of Economics, European University Institute
—Lionel McKenzie, Wilson Professor Emeritus of Economics at the University of Rochester
—Donald J. Brown, Philip R. Allen Professor of Economics, Yale University
—Oliver E. Williamson, Edgar F. Kaiser Professor of Business Administration, Professor of Economics, and Professor of Law, University of California