Armangue-Jubert, Tristany; Pietrobon, Davide; Ruggieri, … - 2025
We argue that capital misallocation arises endogenously due to incomplete consumption insurance. We model risk …-averse entrepreneurs with heterogeneous productivity who face idiosyncratic output shocks and choose how much capital to rent before … uncertainty unfolds. We show that incomplete markets operate as correlated distortions, leading to a reallocation of capital from …