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Risk-Sharing and Investment in Concentrated Markets

Author

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  • Daniel Neuhann

    (UT Austin, McCombs School of Business)

  • Michael Sockin

    (University of Texas at Austin)

Abstract

We study investment and risk sharing in complete markets when agents internalize their impact on asset prices. Quantity shading of state-contingent claims by buyers and sellers generates excess exposure to idiosyncratic risk and low asset pledgeability. This depresses investment, the risk-free rate, and aggregate productivity. Rents from market power distort and misalign agents' marginal valuations of state-contingent returns, rendering risk-sharing constrained inefficient and \emph{as if} markets were competitive but incomplete. When there is limited commitment, sellers face borrowing constraints that limit their ability to strategically restrict supply, thereby reallocating market power to buyers. When markets are decentralized, agents distort investment to capture arbitrage profits by acting as pass-through intermediaries.

Suggested Citation

  • Daniel Neuhann & Michael Sockin, 2019. "Risk-Sharing and Investment in Concentrated Markets," 2019 Meeting Papers 118, Society for Economic Dynamics.
    • Handle: RePEc:red:sed019:118
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    References listed on IDEAS

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    Cited by:

    1. Mr. Damien Capelle, 2021. "Competition vs. Stability: Oligopolistic Banking System with Run Risk," IMF Working Papers 2021/102, International Monetary Fund.

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