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Competition in financial innovation

By Andrés M. Carvajal, Marzena Rostek and Marek Weretka


This paper examines the incentives offered by frictionless markets for innovation of assetbacked securities. Assuming homogeneous preferences across investors with heterogeneous risk-sharing needs and allowing for short selling of securities, we characterize economies in which competition provides insufficient incentives to innovate so that, in equilibrium, asset markets are incomplete in all (pure strategy) equilibria—even when innovation is essentially costless. Thus, we provide an alternative to Allen and Gale’s (1991) classic foundation for endogenous market incompleteness

Publisher: Blackwell Publishing
Year: 2012
DOI identifier: 10.3982/ecta9837
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