-off between competition and risk. Increasing the number of dealers servicing the market decreases the price paid by hedgers but … more competition. Free-entry is optimal for all level of dealers' efficiency if they can constrain risk-taking by its … binding risk constraints to increase revenues at the expense of the hedgers. In other words, dealers can use risk controls to …

In a production economy with trade in financial markets motivated by the desire to share labor-income risk and to … speculate, we show that speculation increases volatility of asset returns and investment growth, increases the equity risk … improve welfare because they substantially reduce speculative trading without impairing excessively risk-sharing trades. …