Information, trade and incomplete markets (Q2509147)

The known no-trade theorem of \textit{P. Milgrom} and \textit{N. Stokey} [J. Econ. Theory 26, 17--27 (1982; Zbl 0485.90018)] states that if rational traders begin with an ex-ante Pareto optimal allocation then the arrival of information cannot generate trade. Completeness of the market is significant for this result. In the reviewed paper, the authors show, using an equilibrium analysis, that if markets are state-contingent incomplete then for the generic economy the arrival of new information does generate trade. The reason for it is that with incomplete markets the arrival of new information creates new risk-sharing opportunities. The framework of the analysis is given by a three period, one good economy model. The agents trade some number of state-contingent securities at the first period. During the second, after arriving of the information, they can retrade the securities. A market is state-contingent complete (or \(\Theta\)-complete) if the number of non-redundant securities equals to the number of possible payoff-relevant states. If the traders agree about the meaning of information and the considered market is state-contingent complete (there are enough securities to hedge against all payoff relevant risk) then the allocation from before the arrival of information remains Pareto optimal and thus the information arrival has no effect. This is a no-retrade result of the authors. But as it was mentioned before, in the case of state-contingent incomplete market, the arrival of information will generate trade, even if information is public and all traders agree on its meaning.