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, and show that limiting the ability of that agent to diversify his risks creates incentives for him to internalize the welfare effects of his decisions, leading to a welfare improvement. Hence, in the presence of risk externalities, disturbing the functioning of perfect financial markets can be socially beneficial. An important implication is, for instance, that allowing oil companies to diversify their exploration risks may result in an inefficiently high risk of environmental catastrophes.

Arvaniti M., Carvajal A. (2018). Risk externalities: When financial imperfections are not the problem, but part of the solution. JOURNAL OF MATHEMATICAL ECONOMICS, 77, 87-100 [10.1016/j.jmateco.2018.03.008].

Risk externalities: When financial imperfections are not the problem, but part of the solution

Arvaniti M.
Primo
;
2018

Abstract

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, and show that limiting the ability of that agent to diversify his risks creates incentives for him to internalize the welfare effects of his decisions, leading to a welfare improvement. Hence, in the presence of risk externalities, disturbing the functioning of perfect financial markets can be socially beneficial. An important implication is, for instance, that allowing oil companies to diversify their exploration risks may result in an inefficiently high risk of environmental catastrophes.
2018
Arvaniti M., Carvajal A. (2018). Risk externalities: When financial imperfections are not the problem, but part of the solution. JOURNAL OF MATHEMATICAL ECONOMICS, 77, 87-100 [10.1016/j.jmateco.2018.03.008].
Arvaniti M.; Carvajal A.
File in questo prodotto:
Eventuali allegati, non sono esposti

I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.

Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/855062
 Attenzione

Attenzione! I dati visualizzati non sono stati sottoposti a validazione da parte dell'ateneo

Citazioni
  • ???jsp.display-item.citation.pmc??? ND
  • Scopus 1
  • ???jsp.display-item.citation.isi??? 1
social impact