Achieving Safety: Personal, Private and Public Provision

Enrico Perotti and Spyros Terovitis

No 19405, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We study how a primary need for minimum safety affects investment choices. In addition to risky projects, agents may choose to invest in personal assets they can control. Investing in personal assets serves as self-insurance, as they ensure a higher minimum return but offer a lower expected return than the risky project offers. In autarky, investors can achieve safety only via self-insurance and costly liquidation of the project. Private intermediaries can reduce inefficient self-insurance by offering safe debt backed by self-insured investors holding equity and can resolve the underlying risk conflict by demandable debt. Public debt crowds out the private supply of safe assets, lowering the safe rate and aggregate investment. In contrast, deposit insurance can either decrease or increase the private supply of safe assets, as well as the safe rate and aggregate investment. Our approach explains the vast and inelastic demand for safe assets, which are hard to explain by standard preferences at times of minimal rates.

Keywords: Safe assets; Demandable debt; Intermediation (search for similar items in EconPapers)
JEL-codes: G11 G21 G28 G51 (search for similar items in EconPapers)
Date: 2024-08
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP19405 (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: Achieving safety: Personal, private, and public provision (2025)
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:19405

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP19405

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 ().