| Summary: | This dissertation studies the intersection between the sharing of individual specific risks and business cycle risks. Individual specific or idiosyncratic risk sharing is typically hampered by moral hazard, and in Chapter 2 we propose a new theory of debt finance as an effective mechanism for sharing idiosyncratic risks. But business cycle or systemic risk sharing is also affected by the means of idiosyncratic risk sharing. Departures from full systemic risk sharing can dampen the incentive compatibility constraint allowing a greater degree of idiosyncratic risk sharing (Chapter 1). Entrepreneurs’ productive risk can quickly transform into low employment, as wages fall below marginal revenue products of labour (Chapter 3). Market prices for systemic risk insurance do not necessarily internalise balance sheet externalities, resulting in excessive swings in leverage and factor market wedges of inefficiency (Chap- ter 4). Sometimes, agents have private information about the risks faced by their projects, and how they correlate with the broader economy. When this is the case, optimal systemic risk sharing arrangements must allocate business systemic risk in a way that deters entrepreneurs from herding among their peers (Chapter 5).
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