A competitive equilibrium may preserve, even magnify, firm-specific risks in the aggregate. This is the case if firms can anticipate their productivites when they make investment decisions or, alternatively, if capital can be reallocated once the productivites of firms are realized. In a large economy, output is serially correlated and the real rate of interest varies countercyclically. On the contrary, in a large economy without anticipation or shiftable investment, a competitive equilibrium is essentially riskless.
More papers in Discussion Paper Serie A from University of Bonn, Germany Address: Bonn Graduate School of Economics, University of Bonn, Adenauerallee 24 - 26, 53113 Bonn, Germany Series data maintained by BGSE Office ().