Incomplete Markets as Correlated Distortions

Tristany Armangue-Jubert (), Davide Pietrobon () and Alessandro Ruggieri
Additional contact information
Tristany Armangue-Jubert: Universitat Autònoma de Barcelona and Barcelona School of Economics, Postal: B3-126, Facultat d'Economia i Empresa Edifici B, UAB, 08193, Bellaterra, Spain, https://www.tarmangue.com/home
Davide Pietrobon: Department of Economics, Lund University, Postal: School of Economics and Management, Box 7080, S-220 07 Lund, Sweden

No 2025:2, Working Papers from Lund University, Department of Economics

Abstract: We argue that capital misallocation arises endogenously due to incomplete consumption insurance. We model risk-averse entrepreneurs with heterogeneous productivity who face idiosyncratic output shocks and choose how much capital to rent before uncertainty unfolds. We show that incomplete markets operate as correlated distortions, leading to a reallocation of capital from more to less productive firms relative to the complete markets benchmark. Using Portuguese administrative data, we document that capital misallocation is greater in locations and industries with higher output shock volatility, consistent with our framework. Leveraging the structure of the model, we show that completing insurance markets increases aggregate productivity and income by 64% and 97%, respectively.

Keywords: Insurance; volatility; misallocation; distortions; efficiency. (search for similar items in EconPapers)
JEL-codes: D61 E22 L23 L26 (search for similar items in EconPapers)
Pages: 55 pages
Date: 2025-02-26
References: View complete reference list from CitEc
Citations:

Downloads: (external link)
https://lucris.lub.lu.se/ws/portalfiles/portal/209183160/WP25_2 Full text (application/pdf)

Related works:
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:hhs:lunewp:2025_002

Access Statistics for this paper

More papers in Working Papers from Lund University, Department of Economics School of Economics and Management, Box 7080, S-22007 Lund, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Iker Arregui Alegria ().