Derivatives and the Efficient Allocation of Price Risks in a General Equilibrium World

I establish an extension of the classical general equilibrium treatment of uncertainty about exogenous states to price uncertainty. Traders do not know the prices at which trade will occur, but have expectations over possible prices. They trade derivatives, price-contingent securities, to insure against the risks arising from this uncertainty. I establish three results: one is a set of necessary and sufficient conditions for the existence of equilibrium, called an equilibrium with price insurance, in such a framework; another is the fact that equilibria with price insurance are Pareto efficient and agents insure themselves optimally against the price uncertainty represented by their price expectations; and finally we show that in this framework agents' price expectations matter, in the sense that they affect the equilibrium allocation of resources