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Abstract

This 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 these risks may lead to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We 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 market level. Institutional reforms that make possible the use of these contracts have important welfare consequences

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Bibliographic Info

Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 60.

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Date of creation: 11 Aug 2004
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Handle: RePEc:sce:scecf4:60

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Web page: http://comp-econ.org/
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Related research

Keywords: Investment Risk; Optimal contracts; Incomplete market; capital accumulation;

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Find related papers by JEL classification:

• D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
• E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity

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Cited by:

1. George-Marios Angeletos, 2005. "Uninsured Idiosyncratic Investment Risk," NBER Working Papers 11180, National Bureau of Economic Research, Inc.

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