There has been a lot of discussion for a while now over how the short market on Tesla is quite crowded. This got me thinking of what possible benefits the short market bestows upon the economy as a whole.
Specifically, supposing some hypothetical company $C$ (that isn't Tesla), that has random payoff at time $t$ of $P_t(x)$ where $x$ is the investment. Supposing that $P_t$ is 'risky' (e.g. $p(P_t(x) = x) = 1$ is 'non risky', and $p(P_t(x) = 2.5x) = 0.5; p(P_t(x) = 0) = 0.5$ is 'risky').
I can vaguely imagine that a mixture of investors and shorters would somehow even out the expected risk for the economy as a whole. Does this intuition hold in reality? If so, what is the mechanism and reasoning here?
I can see at least one avenue by which aggregate risk to the economy can be insured under the right circumstances. Suppose that we have the "risky" business $C$ as defined above. Ceate another business $C_2$ with the same payout, but which succeeds or fails exactly when $C$ fails or succeeds, respectively. If we invest $x/2$ into each company, the payout at time $t$ is exactly $1.25x$ with probability 1. Thus, $C_2$ "evens out" the risk of $C$, and vice versa.
Do short positions also fill this role? Does anything else?