In economics, incomplete markets refers to markets in which the number of Arrow–Debreu securities is less than the number of states of nature. In contrast with complete markets, this shortage of securities will likely restrict individuals from transferring the desired level of wealth among states.
An Arrow security purchased or sold at date t is a contract promising to deliver one unit of income in one of the possible contingencies which can occur at date t + 1. If at each date-event there exists a complete set of such contracts, one for each contingency that can occur at the following date, individuals will trade these contracts in order insure against future risks, targeting a desirable and budget feasible level of consumption in each state (i.e. consumption smoothing). In most set ups when these contracts are not available, optimal risk sharing between agents will not be possible. For this scenario, agents (homeowners, workers, firms, investors, etc.) will lack the instruments to insure against future risks such as employment status, health, labor income, prices, among others.
Read more about Incomplete Markets: Markets, Securities and Market Incompleteness, Possible Reasons For Market Incompleteness, The Failure of The Standard Complete Markets Model, Modeling Market Incompleteness, An Example of Complete Vs. Incomplete Markets
Famous quotes containing the words incomplete and/or markets:
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