Three essays on market efficiency

Since the beginning of Economics as a Science, the role of decentralized markets as an efficient mechanism for resource allocation has been a major issue. The apparition of the Theorems of Welfare conferred great theoretical confidence in the market mechanism. It is still an open question the performance of markets in more realistic set-ups. In a Financial General Equilibrium framework (Chapter 1) we allow agents to default. As a result, the financial structure of the economy becomes endogenous. We find that, in a wide range of cases, the market (integrated by competitive traders) is able to define assets more efficient than many arbitrary ones we choose. Our results suggest that the market is a good resource allocation mechanism and that a great part of the incompleteness in financial markets arises because of a wrong design of securities rather than their numerical insufficiency. In Chapter 2 we introduce market imperfections in a Growth economy. In a simple model we analyze how capital accumulation, technological progress and financial development interact. We extend a model of endogenous growth through new product development by incorporating informational asymmetries which give rise to the endogenous emergence of financial intermediaries. In this framework, we find that (i) intermediaries contribute to growth by collecting information which, by improving their ability to provide risk-pooling services, facilitates the flow of resources to risky innovative activities, and (ii) real sector growth feeds back into finance through changes in factor prices which increase the return to information-gathering by intermediaries. Again, we conclude, the market does a good job and there is no reason to call for public intervention. Finally, in Chapter 3 we depart from the original question. The main goal is to try to get a rationale for some empirical results (trade volume and price changes correlation) in the Finance Literature. A positive answer is found and though the performance of markets is not perfect, we cannot imagine another allocation mechanism that can outperform the price system