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Economies with Observable Types

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  • Paolo Siconolfi

    (Columbia University)

  • Aldo Rustichini

    (University of Minnesota)

Abstract

We study economies of asymmetric information with observable types. Trade takes place in lotteries. Individuals face a standard budget constraint, while the incentive compatibility constraints are imposed on the production set of the intermediaries. This formalization encompasses Moral Hazard, as in Jerez (2003, 2005), and Private Information economies. Equilibrium allocations are constrained efficient, but, contrary to what stated for example in Jerez (2005), the set of equilibrium allocations may be empty and the Second Welfare Theorem may fail. This happens for two reasons. First, constrained efficient allocations may violate the necessary and sufficient conditions of price supportability for the individuals. Second, even when constrained efficient allocation are price supportable, they may fail to be a profit maximizing choice of the firm at the individual supporting prices. To restore existence of an equilibrium the firm has to be restricted to supply allocations with support in the set of incentive compatible contracts. (Copyright: Elsevier)

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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 15 (2012)
Issue (Month): 1 (January)
Pages: 57-71

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Handle: RePEc:red:issued:09-215

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Related research

Keywords: Competitive equilibria; Asymmetric information; Observable types; Adverse selection; Moral hazard;

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References

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  1. Malinvaud, E, 1973. "Markets for an Exchange Economy with Individual Risks," Econometrica, Econometric Society, Econometric Society, vol. 41(3), pages 383-410, May.
  2. Malinvaud, E., 1972. "The allocation of individual risks in large markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 4(2), pages 312-328, April.
  3. Kehoe, Timothy J. & Levine, David K. & Prescott, Edward C., 2002. "Lotteries, Sunspots, and Incentive Constraints," Journal of Economic Theory, Elsevier, Elsevier, vol. 107(1), pages 39-69, November.
  4. Piero Gottardi & Belén Jerez, 2007. "Comment on "Bertrand and Walras Equilibria under Moral Hazard"," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 115(5), pages 893-900, October.
  5. Cass, David & Chichilnisky, Graciela & Wu, Ho-Mou, 1996. "Individual Risk and Mutual Insurance," Econometrica, Econometric Society, Econometric Society, vol. 64(2), pages 333-41, March.
  6. Bel? Jerez, 2001. "A Dual Characterization of Incentive Efficiency," UFAE and IAE Working Papers, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC) 494.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  7. Belen Jerez, 2005. "Incentive Compatibility and Pricing under Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 28-47, January.
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