A Simple Model of Useless Speculation
Murray C. Kemp, Hans-Werner Sinn
The paper presents a general equilibrium model of a pure exchange economy with stochastic endowment in which speculation 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 exchange market may increase social welfare.
Document Object Identifier (DOI): 10.3386/w3513
Published: C and S working Paper , December 1995, Japanese Economic Review 51, (2000), pp. 85-95.