Les Cahiers de Recherche - HEC Paris
H. M. POLEMARCHAKIS and P. J. J. HERINGS
Pareto improving price regulation when the asset market is incomplete
Abstract: When the asset is incomplete, competitive equilibria are
constrained suboptimal, which provides scope for Pareto improving
interventions. Price regulation can be such a Pareto improving policy, even
when the welfare effects of rationing are taken into account. An appealing
aspect of price regulation is that it operates anonymously, on market
variables. The welfare analysis of price regulation calls for an extension
of the equilibrium theory of incomplete markets to fix-price equilibria.
Fix-price equilibria exist under standard assumptions. Necessary and
sufficient conditions characterized fix-price allocations that vary
differentiably with the regulated prices of commodities and assets in a
neighborhood of a competitive equilibrium. Pareto improving price
regulation is generically possible.
Keywords: Incomplete asset market; fix-price equilibria; Pareto improvement; (follow links to similar papers)
JEL-Codes: D45; D52; D60; (follow links to similar papers)
22 pages, February 1, 2000
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