Uninsurable Investment Risks
AbstractThe authors study 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. The authors show that the presence of these risks may lead to an underaccumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. They also show that, although the availability of state-contingent (optimal) contracts cannot provide full insurance, it brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make the use of these contracts possible have important welfare consequences.
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Bibliographic InfoPaper provided by Bank of Canada in its series Working Papers with number 04-29.
Length: 35 pages
Date of creation: 2004
Date of revision:
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Economic models; Financial institutions; Financial markets;
Other versions of this item:
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
- G0 - Financial Economics - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-08-23 (All new papers)
- NEP-CFN-2004-08-23 (Corporate Finance)
- NEP-DGE-2004-08-23 (Dynamic General Equilibrium)
- NEP-FIN-2004-08-23 (Finance)
- NEP-IAS-2004-08-23 (Insurance Economics)
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