Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

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 substitution, so that they value assets differently. Consequently, hold portfolios. This leads segmentation, which we characterize with optimal transport methods. Moreover, there is basis going always same direction: price security lower than replicating portfolios long positions. Finally, expected returns concave factor loadings. (JEL D51, D52, G11, G12)