Pareto Optimality and Competition



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    • Princeton University. This paper surveys a large literature on the optimality of financial markets. Because of limitations of space, it is necessarily selective in coverage and in references. Since my objective, in part, is to bring to the attention of finance economists some recent results in the general theory of imperfect information and uncertainty, the ratio of such articles cited to articles more narrowly focused in the finance literature is higher than a more extended and balanced presentation would warrant. This is not intended as a slight to anyone. Fortunately, at least three extended surveys of related topics have appeared in recent years (Baron [1979], Ross [1978b], and Jensen [1972]), and the interested reader is referred to these for a more extended bibliography. My intellectual debt to Sandy Grossman should be obvious. I am also indebted to Nils Hakansson, Phil Dybvig, and Barry Nalebuff for helpful comments on an earlier draft. Research support from the National Science Foundation is gratefully acknowledged.