Financial innovations that change how promises are collateralized can affect investment, even in the absence of any … change in fundamentals. In C-models, the ability to leverage an asset always generates over-investment compared to Arrow … Debreu. The introduction of CDS always leads to under-investment with respect to Arrow Debreu, and in some cases even …

We show that financial innovations that change the collateral capacity of assets in the economy can affect investment … an asset by selling non-contingent promises can generate over-investment compared to the Arrow-Debreu level. Second, we … show that the introduction of naked CDS can generate under-investment with respect to the Arrow-Debreu level. Finally, we …