This paper shows that, in the absence of a complete set of risk markets, prices provide incorrect signals for guiding production decisions. Even if all individuals have rational expectations concerning the distribution of prices which will prevail on the market next period, the market allocation is, in general, not a constrained Pareto optimum. Essentially the only conditions under which, for all technologies, the market equilibrium is a constrained Pareto optimum are those in which risk markets are redundant. We derive the necessary and sufficient conditions for redundancy of risk markets, which turn out to be extremely restrictive.

This paper shows that, because of capital accumulation effects, the estate tax may increase inequality of income and wealth. If the government takes actions to offset these accumulation effects, the tax will lead to an increase in equality of income and wealth. More generally, the paper argues that to evaluate the incidence of a tax in a growth context, one should compare policy changes which leave the aggregate capital labor ratio unchanged; we call this balanced growth incidence. But even with the capital labor ratio remaining unchanged, the estate tax may increase inequality in the distribution of consumption.

This paper presents a simple, general framework for analyzing externalities in economies with incomplete markets and imperfect information. By identifying the pecuniary effects of these externalities that net out, the paper simplifies the problem of determining when tax interventions are Pareto improving. The approach indicates that such tax interventions almost always exist and that equilibria in situations of imperfect information are rarely constrained Pareto optima. It can also lead to simple tests, based on readily observable indicators of the efficacy of particular tax policies in situations involving adverse selection, signaling, moral hazard, incomplete contingent claims markets, and queue rationing equilibria.

We show that “spanning” does not imply stockholder unanimity if there is trading in the shares of firms. Each basis vector of the space spanned by all firms' output vectors can be treated like a composite commodity. If, in addition to spanning, firms act as price takers with respect to prices of composite commodities, then there is unanimity. We analyze the spanning assumption for the vector space of contingent claims generated by firms' choices of debt-equity ratios. We show that there is a strong relationship between the Modigliani-Miller theorem, spanning, and the existence of a complete set of markets.

I. An example, 473.—II. The generality of the Henry George Theorem, 477.—III. On using land rents as a measure of the benefits from public goods, 490.—IV. Competitive attainability of a Pareto optimal distribution of economic activity, 496.—V. Concluding comments, 498.

After the Big Bang? Obstacles to the Emergence of the Rule of Law in Post-Communist Societies by Karla Hoff and Joseph E. Stiglitz. Published in volume 94, issue 3, pages 753-763 of American Economic Review, June 2004

The ability of capital markets to distinguish firms of different value by the size of their initial equity offerings is attenuated when insiders can sell equity more than once. A model is developed in which there is price risk from holding equity between periods. When the uncertainty is small, there must be pooling in the first period. When uncertainty is large, the pooling equilibria dominate the separating equilibrium.