Working Paper: NBER ID: w23986
Authors: Bruno Biais; Johan Hombert; Pierre-Olivier Weill
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 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.
Keywords: risk sharing; asset pricing; market segmentation; incentive constraints
JEL Codes: D5; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| incentive constraints (D10) | ability of agents to share risk (G22) |
| ability of agents to share risk (G22) | market segmentation (M31) |
| incentive constraints (D10) | market segmentation (M31) |
| binding incentive constraints (D10) | intertemporal marginal rates of substitution (D15) |
| intertemporal marginal rates of substitution (D15) | asset valuations (G32) |
| incentive constraints (D10) | asset pricing (G19) |
| price of a tree (Q23) | pledgeability (G32) |
| equilibrium expected returns (D50) | factor loadings (C38) |
| factor loadings (C38) | expected returns (G17) |