Uninsurable Investment Risks

Cesaire Meh and Vincenzo Quadrini

Staff Working Papers from Bank of Canada

Abstract: The authors study 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. The authors show that the presence of these risks may lead to an underaccumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. They also show that, although the availability of state-contingent (optimal) contracts cannot provide full insurance, it brings the aggregate stock of capital close to the complete markets level. Institutional reforms that make the use of these contracts possible have important welfare consequences.

Keywords: Economic models; Financial institutions; Financial markets (search for similar items in EconPapers)
JEL-codes: D31 E21 G0 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2004
New Economics Papers: this item is included in nep-cfn, nep-dge, nep-fin and nep-ias
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Citations: View citations in EconPapers (3)

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Working Paper: Uninsurable Investment Risk (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:04-29

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