Simple Market Structures are Incomplete

• Authors: Johannes Gierlinger and Pau Milán
• International Economic Review, November 2025.

We propose a model of categorization in financial markets where states are defined by payoff-relevant variables, but all securities are measurable with respect to strict subsets of these variables. This limits insurance against variable interactions: no combination of securities can compensate the absence of an instrument targeting a given set of variables. We provide a decomposition result that identifies the uninsurable component of income risk for any market. We derive a lower bound on the number of securities required for efficiency. Using the same techniques, we characterize the payoff space when individuals condition only on a personal set of variables.