Incomplete Forward Markets in a Pure Exchange Economy with Stochastic Endowments

Abstract

Jacques Dreze has stressed the need for research into the functions and shortcomings of existing institutions and for the application of standard welfare economics based on Pareto optimality to limited exchange opportunities for the allocation of risk bearing. The objective of the paper is to examine the workings and welfare implications of actual forward markets and to place those markets in the context of complete contingent commodity markets. Second best government policies in the absence of complete markets are explored.