Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing
American Economic Review
vol. 111,
no. 11, November 2021
(pp. 3575-3610)
Abstract
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 transport 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.Citation
Biais, Bruno, Johan Hombert, and Pierre-Olivier Weill. 2021. "Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing." American Economic Review, 111 (11): 3575-3610. DOI: 10.1257/aer.20181707Additional Materials
JEL Classification
- D51 Exchange and Production Economies
- D52 Incomplete Markets
- G11 Portfolio Choice; Investment Decisions
- G12 Equities; Fixed Income Securities