Citation

Discussion Paper Details

Please find the details for DP4807 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Endogenous Market Incompleteness with Investment Risks

Author(s): Césaire A. Meh and Vincenzo Quadrini

Publication Date: December 2004

Keyword(s): Aggregate Capital, Asymmetric Information and optimal contracts

Programme Area(s): International Macroeconomics

Abstract: This Paper studies a general equilibrium economy in which agents have the ability to invest in a risky technology. The investment risk cannot be fully insured with optimal contracts because shocks are private information. We show that the presence of investment risks leads to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We also show that the availability of state-contingent (optimal) contracts ? compared to simple debt contracts ? brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make possible the use of these contracts have important welfare consequences.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4807

Bibliographic Reference

Meh, C and Quadrini, V. 2004. 'Endogenous Market Incompleteness with Investment Risks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=4807