WELFARE EFFECTS OF FINANCIAL INNOVATION IN INCOMPLETE MARKETS ECONOMIES WITH SEVERAL CONSUMPTION GOODS

We show that in almost every incomplete markets economy with more than one consumption good, and with sufficiently many uninsured states of nature, at any general equilibrium of this economy it is possible to arbitrarily perturb the equilibrium utilities merely by introducing the appropriate asset-making, for example, all agents worse off. This result demonstrates that the examples given by Hart (On the optimality of equilibrium when the market structure is incomplete, J. Econ. Theory 11 (1975), 418-443) and others are actually general phenomena and is in sharp contrast to the intuition that innovation, since it expands financial opportunities, should benefit all agents. Journal of Economic Literature Classification Numbers D52, D60, G10. (C) 1995 Academic Press, Inc.