Diversification and Competition: Financial Intermediation in a Large Cournot-Walras Economy

Consider an economy under uncertainty where risk sharing is achieved through purchase of securities from partially diversified financial intermediaries who behave as Cournot competitors. When the economy is appropri-- ately replicated, the Cournot-Walras equilibrium converges to the (Malinvaud) perfectly competitive equilibrium with no uncertainty. The price of securities in an r-replicated Cournot-Walras economy converges to the price in the no uncertainty, perfectly competitive economy at the rate -71t, as in a benchmark partial equilibrium Cournot market with no uncertainty. However, the rate of convergence of individual welfare is typically slower than in the benchmark market (i.e. slower than -1-), and so is the rate of convergence of traded quantities. The cause of the slow convergence is the presence of uncertainty, not the general equilibrium nature of the model. An implication of the analysis is that in a sufficiently large economy, risk sharing through (imperfectly competitive) financial intermediaries is an almost perfect substitute for other forms of risk sharing. However, the slow rate of convergence of the welfare level suggests that the qualification "sufficiently large" cannot be taken lightly.