A Simple Model of Useless Speculation
Working Paper 3513
DOI 10.3386/w3513
Issue Date
The paper presents a general equilibrium model of a pure exchange economy with stochastic endowment in which speculation is profitable and stabilizes prices, but is useless from a welfare point of view. Reconciling the Siegel paradox with the theory of incomplete markets we show that banning speculation by closing the forward exchange market may increase social welfare.
Published Versions
C and S working Paper , December 1995, Japanese Economic Review 51, (2000), pp. 85-95.