Discussion paper

DP14257 Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Incentive problems make securities' payoffs imperfectly pledgeable, limiting agents' ability to issue
liabilities. We analyze the equilibrium consequences of such endogenous incompleteness in a dynamic
exchange economy. Because markets are endogenously incomplete, agents have different intertemporal
marginal rates of substitution, so that they value assets differently. Consequently, agents hold different
portfolios. This leads to endogenous markets segmentation, which we characterize with Optimal Trans-
port methods. Moreover, there is a basis going always in the same direction: the price of a security
is lower than that of replicating portfolios of long positions. Finally, equilibrium expected returns are
concave in factor loadings.


Biais, B, J Hombert and P Weill (2019), ‘DP14257 Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing‘, CEPR Discussion Paper No. 14257. CEPR Press, Paris & London. https://cepr.org/publications/dp14257