Advertisement

The Significance of Risk under Incomplete Markets

  • Jean-Paul Chavas
  • Zohra Bouamra-Mechemache
Chapter
Part of the Natural Resource Management and Policy book series (NRMP, volume 23)

Abstract

The efficiency of complete competitive markets is well known (e.g., Allais 1943, 1981, Arrow and Debreu 1954, Debreu 1959, Mas-Colell, Whinston, and Green 1995, Luenberger 1995). Efficiency results apply as well to the allocation of risk (e.g., Debreu 1959). Yet markets (and especially risk markets) are typically incomplete. This is particularly true in the agricultural sector where weather uncertainty and unstable commodity markets can generate significant income risk, often borne by farmers. This has stimulated a policy debate on the efficiency of risk allocation and the relative role of market mechanisms versus government interventions. This is a complex issue. The limitations of alternative approaches have been pointed out. Market failures have been contrasted with government failures. In addition, the prevalence of both incomplete markets and incomplete contracts has made the economic analysis of risk allocation somewhat difficult.

Keywords

Transaction Cost Risk Aversion Information Cost Risk Market Competitive Equilibrium 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Allais, M. 1943. Traité d’Economie Pure (Vol. 3 ). Paris: Imprimerie Nationale.Google Scholar
  2. Allais, M. 1981. “La Théorie Générale des Surplus.” Economies et Sociétés. Institut des Sciences Mathématiques et Economiques Appliquées.Google Scholar
  3. Arrow, K.J. 1964. “The Role of Securities in the Optimal Allocation of Risk-Bearing” Review of Economic Studies. 31 (Apri 11964): 91–96.CrossRefGoogle Scholar
  4. Arrow, K.J. 1970. Essays in the Theory of Risk-Bearing. Amsterdam: North Holland Publishing Co.Google Scholar
  5. Arrow, K.J., and G. Debreu. 1954. “Existence of an Equilibrium for a Competitive Economy.” Econometrica 22: 265–290.CrossRefGoogle Scholar
  6. Berge, C. 1963. Topological Spaces. New York: Macmillan.Google Scholar
  7. Chavas, J.-P., and Z. Bouamra-Mechemache. 2001. “Economic Efficiency and Market Equilibrium under Transaction Costs.” Working paper, Department of Agricultural and Applied Economics, University of Wisconsin, Madison.Google Scholar
  8. Deaton, A., and J. Muellbauer. 1980. Economics and Consumer Behavior. New York: Cambridge University Press.CrossRefGoogle Scholar
  9. Debreu, G. 1959. Theory of Value. New York: Wiley.Google Scholar
  10. DeGroot, M.H. 1970. Optimal Statistical Decisions. New York: McGraw-Hill Book Co.Google Scholar
  11. Diewert, W.E. 1974. “Applications of Duality Theory.” In M.D. Intriligator and D.A. Kendrick, eds., Frontiers of Quantitative Economics (Vol. II ). Amsterdam: North Holland.Google Scholar
  12. Duffle, J.D. 1988. Security Markets: Stochastic Models. New York: Academic Press.Google Scholar
  13. Foley, D.K. 1970. “Economic Equilibrium with Costly Marketing.” Journal of Economic Theory 2: 276–291.CrossRefGoogle Scholar
  14. Hahn, F.H. 1971. “Equilibrium With Transaction Costs.” Econometrica 39: 417–439.CrossRefGoogle Scholar
  15. Heller, W.P., and R.M. Starr. 1976. “Equilibrium with Non-Convex Transaction Costs: Monetary and Non-Monetary Economies.” Review of Economic Studies 43: 195–215.CrossRefGoogle Scholar
  16. Luenberger, D.G. 1992a. “New Optimality Principles for Economic Efficiency and Equilibrium.” Journal of Optimization Theory and Applications 75: 221–264.CrossRefGoogle Scholar
  17. Luenberger, D.G. 1992b. “Benefit Functions and Duality.” Journal of Mathematical Economics 21: 461–481.CrossRefGoogle Scholar
  18. Luenberger, D.G. 1994. Luenberger, D.G. 1994. “Dual Pareto Efficiency.” Journal of Economic Theory 62: 70–85.CrossRefGoogle Scholar
  19. Luenberger, D.G. 1995. Microeconomic Theory. New York: McGraw-Hill, Inc.Google Scholar
  20. Machina, M.J. 1987. “Choice under Uncertainty: Problems Solved and Unsolved.” Journal of Economic Perspectives 1: 121–154.CrossRefGoogle Scholar
  21. Mas-Colell, A., M.D. Whinston, and J. Green. 1995. Microeconomic Theory. New York: Oxford University Press.Google Scholar
  22. Ostroy, J.M. 1980. “The No-Surplus Condition as a Characterization of Perfectly Competitive Equilibrium.” Journal of Economic Theory 22: 183–207.CrossRefGoogle Scholar
  23. Pratt, J.W. 1964. “Risk Aversion in the Small and in the Large.” Econometrica 32: 122–136.CrossRefGoogle Scholar
  24. Radner, R. 1968. “Competitive Equilibrium under Uncertainty.” Econometrica 36: 31–58.CrossRefGoogle Scholar
  25. Sandmo, A. 1971. “On the Theory of the Competitive Firm under Price Uncertainty.” American Economic Review 61: 65–73.Google Scholar
  26. Starr, R.M. (ed.) 1989. General Equilibrium Models of Monetary Economies. Boston: Academic Press.Google Scholar
  27. Takayama, A. 1985. Mathematical Economics ( 2nd edition ). Cambridge: Cambridge University Press.Google Scholar

Copyright information

© Springer Science+Business Media New York 2002

Authors and Affiliations

  • Jean-Paul Chavas
    • 1
    • 2
  • Zohra Bouamra-Mechemache
    • 1
    • 2
  1. 1.University of WisconsinMadisonUSA
  2. 2.Institut National de la Recherche AgronomiqueToulouseFrance

Personalised recommendations