Misallocation and risk sharing
Hengjie Ai,
Anmol Bhandari,
Chao Ying and
Yuchen Chen
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Hengjie Ai: University of Minnesota
Anmol Bhandari: University of Minnesota
Yuchen Chen: University of Minnesota
No 1215, 2019 Meeting Papers from Society for Economic Dynamics
Abstract:
This paper shows that factor misallocation is closely tied to the risk-sharing avenues available to firm owners. In contrast to the commonly studied bond-only economy with collateral constraints (for example Moll (2014)), we find that the degree of misallocation is increasing in persistence of the idiosyncratic risk when firms have access to state-contingent contracts. The possibility to transfer wealth from high productivity states to low productivity states allows firm owners to trade off efficient allocation of consumption against efficient allocation of capital. We show that for reasonable values of risk aversion, insurance needs more than offset production efficiency concerns and thereby generates large capital misallocation.
Date: 2019
New Economics Papers: this item is included in nep-bec, nep-cta, nep-dge, nep-eff and nep-ias
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed019:1215
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