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Uninsurable Investment Risk

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  • Cesaire Meh (co-author Vincenzo Quadrini)

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 these risks may lead to under-accumulation of capital relative to an economy where idiosyncratic shocks can be fully insured. We 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 market level. Institutional reforms that make possible the use of these contracts have important welfare consequences

Suggested Citation

  • Cesaire Meh (co-author Vincenzo Quadrini), 2004. "Uninsurable Investment Risk," Computing in Economics and Finance 2004 60, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:60
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Cristian Pardo, 2013. "Entrepreneurial risk aversion, net worth effects and real fluctuations," Review of Financial Economics, John Wiley & Sons, vol. 22(4), pages 158-168, November.
    2. Sagiri Kitao, 2005. "Income taxation with uninsurable endowment and entrepreneurial investment risks," 2005 Meeting Papers 514, Society for Economic Dynamics.
    3. George-Marios Angeletos, 2005. "Uninsured Idiosyncratic Investment Risk," NBER Working Papers 11180, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    Investment Risk; Optimal contracts; Incomplete market; capital accumulation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity

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