Endogenous market incompleteness with investment risks
AbstractThis Paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology. The investment risk cannot be fully insured with optimal contracts because shocks are private information. We show that the presence of investment risks leads to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We also show that the availability of state-contingent (optimal) contracts â compared to simple debt contracts â brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make possible the use of these contracts have important welfare consequences.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economic Dynamics and Control.
Volume (Year): 30 (2006)
Issue (Month): 11 (November)
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Web page: http://www.elsevier.com/locate/jedc
Other versions of this item:
- Meh, Césaire A. & Quadrini, Vincenzo, 2004. "Endogenous Market Incompleteness with Investment Risks," CEPR Discussion Papers 4807, C.E.P.R. Discussion Papers.
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
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