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No 694:
Pareto improving price regulation when the asset market is incomplete

H. M. POLEMARCHAKIS and P. J. J. HERINGS

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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