On the quantitative importance of market completeness

This paper quantitatively compares allocations in calibrated large overlapping generations growth models that only differ in their market structures for insuring against aggregate risk. The findings are that the equilibrium behavior of aggregate variables is very similar across all market structures. There are only minor differences: the ratio of the volatility of aggregate consumption relative to that of investment is higher in complete market economies, due partly to the higher volatility of consumption of older people. It was also found that the risk premia in complete markets economies is basically zero. Therefore, we can conclude that we can for the most part abstract from the issue of whether there exist markets for aggregate risk.