Andrés Carvajal

Competition in Financial Innovation

This paper examines the incentives to innovate securities provided by frictionless competitive markets (with short sales) to entrepreneurs. In economies with symmetric investor utilities, we provide the conditions under which a …rm’s market value is maximized by a complete …nancial structure –that is, when the mechanism that gives rise to market incompleteness is the one illustrated in the classical example of Allen and Gale (1991). The foundation for incompleteness in that case is derived from innovation costs and free riding among entrepreneurs. For the class of preferences where an incomplete …nancial structure maximizes the …rms’market values, markets are incomplete with a probability of one, even when innovation is cost free. In this sense, we provide an alternative to Allen and Gale’s foundation for market incompleteness.

Idiosyncratic risk and financial policy

In economies subject to uninsurable idiosyncratic risks, competitive equilibrium allocations are constrained inefficient: reallocations of assets support Pareto superior allocations. This is the case even if the asset market for the allocation of aggregate risks is complete.

Identification of Preferences from Market Data

We offer a new proof that the equilibrium manifold (under complete markets) identifies individual demands globally. Moreover, under observation of only a subset of the equilibrium manifold, we find domains on which aggregate and individual demands are identifiable. Our argument avoids the assumption of Balasko (2004) requiring the observation of the complete manifold.

Statistical calibration: A simplification of Foster’s proof

Foster (1999) has given a proof of the Calibration Theorem of Foster and Vohra (1998), using the Approachability Theorem proposed by Blackwell (1956). This note presents a simplified version of Fosters argument, invoking the specialization given by Greenwald et al. (2006) of Blackwells Theorem.

Identification of Individual Demands from Market Data under Uncertainty

We show that, even under incomplete markets, the equilibrium manifold identifies individual demands everywhere in their domains. Under partial observation of the manifold, we determine maximal subsets of the domains on which identification holds. For this, we assume conditions of smoothness, interiority and regularity. It is crucial that there be date-zero consumption. As a by-product, we develop a duality theory under incomplete markets.

When Financial Imperfections Are Not the Problem, But the Solution

The BP Deepwater Horizon oil spill of 2010 has focused considerable attention on the potential liability and the operating conduct of big oil companies. This paper shows that, limiting the ability of a company to insure and diversify its risks, creates incentives to internalize the welfare effects of catastrophic events, leading to a welfare improvement. We model an economy with complete financial markets where one agent’s actions impose an externality on other agents by altering the probability distribution of their risks. Then, a Pareto improved allocation can be reached via an asset reallocation, essentially restricting this agent’s choice of portfolio of assets. Hence, in the presence of externalities, disturbing the functioning of perfect financial markets can be socially beneficial.