Risk-Sharing and Investment in Concentrated Markets

Daniel Neuhann and Michael Sockin
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Daniel Neuhann: UT Austin, McCombs School of Business
Michael Sockin: University of Texas at Austin

No 118, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: We study investment and risk sharing in complete markets when agents internalize their impact on asset prices. Quantity shading of state-contingent claims by buyers and sellers generates excess exposure to idiosyncratic risk and low asset pledgeability. This depresses investment, the risk-free rate, and aggregate productivity. Rents from market power distort and misalign agents' marginal valuations of state-contingent returns, rendering risk-sharing constrained inefficient and \emph{as if} markets were competitive but incomplete. When there is limited commitment, sellers face borrowing constraints that limit their ability to strategically restrict supply, thereby reallocating market power to buyers. When markets are decentralized, agents distort investment to capture arbitrage profits by acting as pass-through intermediaries.

Date: 2019
New Economics Papers: this item is included in nep-com, nep-dge and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:118

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