We analyze optimal hedging contracts and show that although hedging aims at sharing risk, it can lead to more risk-taking. News implying that a hedge is likely to be loss-making undermines the risk-prevention incentives of the protection seller. This incentive problem limits the capacity to...

Derivatives activity, motivated by risk-sharing, can breed risk-taking. Bad news about the risk of the asset underlying the derivative increases the expected liability of a protection seller and undermines her risk-prevention incentives. This limits risk-sharing, and may create endogenous...

Incentive problems make assets imperfectly pledgeable. Introducing these problems in an otherwise canonical general equilibrium model yields a rich set of implications. Asset markets are endogenously segmented. There is a basis going always in the same direction, as the price of any risky asset...