Notes on optimality of rational expectations equilibrium with incomplete markets (Q1096518)

This paper shows that under certain conditions, an economy with securities and post-state spot markets can support rational expectations equilibria of economies in a partial Arrow-Debreu regime of incomplete contingent markets. Using these conditions, examples are constructed to show that non-optimal equilibria might exist for the securities regime and introduction of additional securities might make everyone worse off. These examples are shown to be robust and valid in a more general context than those of Hart.