Uninsurable Investment Risk
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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