The paper extends Diamond’s (1984) analysis of financial contracting with information asymmetry ex post and endogenous ”bankruptcy penalties” to allow for risk aversion of the borrower. The optimality of debt contracts, which Diamond obtained for the case of risk neutrality, is shown to be nonrobust to the introduction of risk aversion. This contrasts with the costly state verification literatu...

Manski [2004] analyzes the relationship between the distribution of traders’ beliefs and the equilibrium price in a prediction market with risk neutral traders. He finds that there can be a substantial difference between the mean belief that an event will occur, and the price of an asset that pays one dollar if the event occurs and otherwise pays nothing. This result is puzzling, since these ma...

A monopolist typically defers entry into an industry as both price uncertainty and the level of relative risk aversion increase. The former attribute may be present in most deregulated industries, while the latter may be relevant for reasons of market incompleteness or the presence of technical uncertainty. By contrast, it has been shown that the presence of a rival hastens entry under risk neu...

Manski [2004] analyzes the relationship between the distribution of traders’ beliefs and the equilibrium price in a prediction market with risk neutral traders. He finds that there can be a substantial difference between the mean belief that an event will occur, and the price of an asset that pays one dollar if the event occurs and otherwise pays nothing. This result is puzzling, since these ma...

In a general equilibrium model with risk neutral and risk averse agents, we show that if banks issue both demand deposits and equity, then free banking is run-proof and ecient. In particular, we obtain the ®rst best insurance solution if there is adequate risk neutral capital. If sucient risk neutral capital is unavailable, then a partial suspension of convertibility is optimal. In general, t...

At t = 0, two instruments are available. Any amount (even fractional) of either instrument may be sold or puschased at the specified market price i.e., arbitrary short or long positions are allowed. A risk free asset or bond, B, and a stock, S. At t = 0 (the first period), the bond is worth B(0), and, the stock is worth S(0) = 100. At t = T (the second period), the economy can be in one of two ...

In a binary prediction market in which risk-neutral traders have heterogeneous prior beliefs and are allowed to invest a limited amount of money, the static rational expectations equilibrium price is demonstrated to underreact to information. This effect is consistent with a favorite-longshot bias, and is more pronounced when prior beliefs are more heterogeneous. Relaxing the assumptions of ris...

In an incomplete financial market in which the dynamics of the asset prices is driven by a d-dimensional continuous semimartingale X, we consider the problem of pricing European contingent claims embedded in a power utility framework. This problem reduces to identifying the p-optimal martingale measure, which can be given in terms of the solution to a semimartingale backward equation. We use th...

In [Riesner, M., 2006. Hedging life insurance contracts in a Lévy process financial market. Insurance Math. Econom. 38, 599–608] the (locally) risk-minimizing hedging strategy for unit-linked life insurance contracts is determined in an incomplete financial market driven by a Lévy process. The considered risky asset is not a martingale under the original measure and therefore, a change of measu...

I consider an independent private values auction environment with risk–neutral buyers and an either risk–neutral or risk–averse seller. My setting differs from standard settings in two respects. First, the seller does not know his reservation value at the time he designs the auction, and second, he cannot commit to selling after observing the outcome of the auction. For general distributions of...