These four essays address issues related to the incompleteness of financial markets in competitive exchange economies. The main point we try to establish is that when markets are incomplete, a wide range of economic policies have an impact on equilibrium allocations and therefore on the welfare of society, even when these policies are perfectly foreseen by rational agents. This impact may be positive or negative, depending on the specific parametric form representing the exchange economy, but the effectiveness is robust to such specifications. We first develop a differential technique that allows evaluating the welfare effects of government intervention in partially controlled economies with missing financial markets. Second, we apply this procedure to show that a small change in taxes and subsidies can achieve positive effects on all households' welfare. Third, we show that the government can have an active role in promoting socially beneficial financial innovation in these economies, provided that the degree of market deficiency is sufficiently high, when compared to the degree of household heterogeneity. This result also shows that security designers may have an incentive to introduce Pareto-improving new financial instruments, but not to the point of completing the markets. If one restricts the designers' access to information, a problem of indeterminacy of expectations and a coordination failure is obtained, so that markets may not be endogenously completed. Finally, we show when the lack of markets may not lead to inefficiencies in the case of asymmetric information that gives rise to identical individual risks across consumers. A condition on the information structure, weaker than the usual nonexclusivity, can be shown to be sufficient to guarantee incentive compatibility of equilibrium in this case.
