Endogenous Market Incompleteness with Investment Risks

Vincenzo Quadrini and Cesaire Meh

No 4807, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 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 ? compared to simple debt contracts ? 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.

Keywords: Asymmetric information; Optimal contracts; Aggregate capital (search for similar items in EconPapers)
JEL-codes: D58 D82 E20 (search for similar items in EconPapers)
Date: 2004-12
New Economics Papers: this item is included in nep-fmk, nep-mac and nep-mic
References: Add references at CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://cepr.org/publications/DP4807 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Endogenous market incompleteness with investment risks (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:4807

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP4807

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().