We consider an economy with an incomplete securities market and
heterogeneously informed investors. Each investor trades in the
market to hedge the risk to his endowment and to speculate on future
security payoffs using his private information. We examine the
efficiency of the securities market in allocating risk and
transmitting information under different market structures, as
defined by the set of securities traded in the market. We show that
the introduction of derivative securities can decrease the market's
efficiency in revealing information on security payoffs, and increase
the equity premium and price volatility in the market.