A simple model of privately profitable but socially useless speculation

The paper presents a general equilibrium model of a pure exchange economy w ith stochastic endowments, in which speculation in the forward market is pr ofitable and stabilizes prices but is useless from a welfare point of view. Reconciling the Siegel paradox with the theory of incomplete markets, we s how that banning speculation by closing the forward market may increase soc ial welfare. We also show that the addition of a market might reduce the ga ins from international trade for all participating countries. JEL Classific ation Numbers: F10, F11, F19.