Contracts and domination in incomplete markets: what is a true core?

Abstract

The goal of the paper is to propose and study a concept of domination by coalitions for incomplete markets. Previously elaborated in the context of contractual approach, now it is presented in more or less standard terms and style. This concept is described as a set of allocations implemented by the net trades (webs of contracts) that are characterized by a special kind of stability in future markets: (i) for every state of the world inducted allocation has to be Pareto optimal and individually rational and (ii) there is no coalition which is able to dominate the allocation via financially feasible trades in future spot markets using real assets and relative to prices specified by (i) (partial Pareto prices). This core converts into a classical one when the market turns complete. Under perfect competition conditions core allocations are GEI-equilibria. These properties prove the validity of suggested core.