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Capital Allocation and Risk Sharing


Time:10:30 am - 12:00 pm, Dec. 7th, 2020

Speaker:Hengjie Ai

(Associate Professor of Finance, Carlson School of Management, University of Minnesota)

Venue: 359s, Overseas Exchange Center, Peking University

Platform: TencentMeeting (for those who can't join in the on-site seminar)

Link: https://meeting.tencent.com/s/Ipe2L6gBYZ3f




We develop an optimal contracting model in which limited enforcement of financial contracts generates dispersion in marginal products of capital across firms. We show that the optimal contract can be implemented using state-contingent transfers and a simple collateral constraint that limits the capital input of firms by a fraction of the financial wealth of the firm owner. Compared to models with exogenous collateral constraint and incomplete markets (for example Moll (2014)), we find that the degree of measured misallocation is increasing in the persistence of the idiosyncratic productivity shocks. Under the optimal contract, the possibility to transfer wealth from high productivity states to low productivity states allows firm owners to trade off efficient allocation of consumption against the efficient allocation of capital. We show that for reasonable values of risk aversion, insurance needs more than offset production efficiency concerns.




Professor Hengjie Ai is an Associate Professor in Finance at the Carlson School of Management, University of Minnesota. Prior to joining the University of Minnesota, he was an assistant professor at the Fuqua School of Business, Duke University. He is currently the president-elect of the Midwest Finance Association and serves on the nominating committee of the American Finance Association. Professor Ai's research interest includes topics in asset pricing, corporate finance, and macroeconomic theory. His research has been published in top Economics journals such as Econometrica and top finance journals such as the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies. Professor Ai holds a PhD in Economics from University of Minnesota.