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Complete Markets
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The chapter presents a model with complete markets, a situation in which consumers can access a full set of insurance contracts and are protected against any possible risk. Although in this model consumers are exposed to risks, the complete-market assumption in fact neutralizes their effect on consumption. The assumption of complete markets has two consequences for the analysis of intertemporal choice. First, it neutralizes the effect of uncertainty on the distribution of individual consumption over time. Individuals behave as if there were no uncertainty. Second, it makes individual behavior coincide with aggregate behavior, so that we can study either one indifferently. The chapter also surveys some of the tests of the complete-market hypothesis and the implication of the complete-market hypothesis for consumption inequality and consumption mobility.
Title: Complete Markets
Description:
The chapter presents a model with complete markets, a situation in which consumers can access a full set of insurance contracts and are protected against any possible risk.
Although in this model consumers are exposed to risks, the complete-market assumption in fact neutralizes their effect on consumption.
The assumption of complete markets has two consequences for the analysis of intertemporal choice.
First, it neutralizes the effect of uncertainty on the distribution of individual consumption over time.
Individuals behave as if there were no uncertainty.
Second, it makes individual behavior coincide with aggregate behavior, so that we can study either one indifferently.
The chapter also surveys some of the tests of the complete-market hypothesis and the implication of the complete-market hypothesis for consumption inequality and consumption mobility.
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