A Simple Model of Privately Profitable But Socially Useless Speculation

Authors: Kemp, Murray C.¹; Sinn, Hans-Werner²

Source: Japanese Economic Review, Volume 51, Number 1, March 2000 , pp. 84-94(11)

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Abstract:

The paper presents a general equilibrium model of a pure exchange economy with stochastic endowments, in which speculation in the forward market 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 market may increase social welfare. We also show that the addition of a market might reduce the gains from international trade for all participating countries.

JEL Classification Numbers: F10, F11, F19.

Document Type: Original article

DOI: http://dx.doi.org/10.1111/1468-5876.00140

Affiliations: 1: University of New South Wales, 2: University of Munich

Publication date: 2000-03-01