A 2ND WELFARE THEOREM FOR CONSTRAINED EFFICIENT ALLOCATIONS IN INCOMPLETE MARKETS

The notion of Diamond's (American Economic Review, 1967, Vol. 57, pp. 759-776) constrained efficiency in a two period incomplete markets mod el is analyzed. We show that a constrained efficient allocation can be sustained as an incomplete markets equilibrium if there is a suitable redistribution of the first period's endowments. We also give a neces sary condition for constrained efficiency, and prove that the set of e conomies in which a constrained efficient allocation exists is an open and dense set in the space of economies which is parameterized by end owments and assets.