Deliberate Limits to Arbitrage

This paper develops a model in which an arbitrageur may prefer to incur limits to arbitrage rather than seamlessly refinance his positions with other arbitrageurs in order to relax his capital constraints. Such deliberate limits to arbitrage arise because the sale of a position cannot be unbundled from the communication of the idea underlying it. The absence of property rights on arbitrage ideas implies that this creates future competition. We let arbitrage opportunities differ along the ease with which they can be identified and along the speed at which they mature. We find that such deliberate limits to arbitrage arise for arbitrage opportunities that are neither too slow nor too quick to mature. The range of maturities for which arbitrage is limited increases when arbitrage opportunities are easier to find.