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.
Published: C and S working Paper , December 1995, Japanese Economic Review 51, (2000), pp. 85-95.