Incentive Constrained Risk Sharing, Segmentation, and Asset Pricing

Incentive problems make securities' payoffs imperfectly pledge able , 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 transport 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. (JEL D51, D52, G11, G12)