Essays on asset market and differential information economies

The inability of institutions in an economy to accommodate full diversification of risks is the key idea behind the incomplete asset markets and the differential information models. The interface between these classes of models, lies in the fact that both of them limit the degree of risk sharing that can occur in an economy, by placing restrictions on the possible future trades of individuals. In this way fully optimal allocations can be reached only through sequential trades. This thesis is focused on the cooperative approach to incomplete asset markets and differential information economies. In brief, the thesis can be described as the study of sequential cooperative games. It is motivated by the fact that often, contracts and asset trades are the objects of coalitional bargaining (e.g., labor contracts or international trade agreements). We introduce a new core concept, termed the Two Stage Core. This core notion is appropriate for economies with trade in two periods, where trades in the first period (ex ante) are limited so that in the second period (ex post) there is need for recontracting. Briefly, the results in this thesis are as follows. We show that the two stage core always exists under standard continuity and concavity assumptions. We derive the two stage core of an asset markets economy as a specification of the two stage core. In order to capture the case of arbitrary short sales we provide a core existence proof for the case of consumption sets with no lower bound. Further, we show that the two stage core is non empty in the Hart (1975) example where a rational expectations equilibrium fails to exist. Finally, we apply this core concept to differential information economies and show that the two stage core is incentive compatible in the sense that no coalition of agents can misreport the true state and provide improvements to all its members, even by redistributing the benefits from misreporting.U of I OnlyETDs are only available to UIUC Users without author permissio