OPTIMAL INCOMPLETE MARKETS WITH ASYMMETRIC INFORMATION

This paper provides a simple parametric framework for comparing alternative incomplete asset structures in a productive economy, focusing on the role of assets in allocating risk and transmitting private information. It characterizes asset structures that are constrained efficient in the sense that no other asset structure, with the same number of securities, leads to a Pareto-dominating allocation in equilibrium. Specifically, a constrained efficient asset structure must be efficient with respect to both risk-sharing and information-transmission. Explicit optimality criteria are developed and used to evaluate innovation by volume maximizing futures exchanges. Journal of Economic Literature Classification Numbers: G14, D52, D82. (C) 1995 Academic Press, Inc.