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Moral hazard and general equilibrium in large economies

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  • Marcos B. Lisboa

    ()
    (Escola da Pós-Graduação em Economia, Fundação Getúlio Vargas, Rio de Janeiro, RJ 22253-900, BRAZIL)

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    Abstract

    The paper analyzes a two period general equilibrium model with individual risk, aggregate uncertainty and moral hazard. There is a large number of households, each facing two individual states of nature in the second period. These states differ solely in the household's vector of initial endowments, which is strictly larger in the first state (good state) than in the second state (bad state). In the first period each household chooses a non-observable action. Higher levels of action give higher probability of the good state of nature to occur, but lower levels of utility. Households' utilities are assumed to be separable in action and the aggregate uncertainty is independent of the individual risk. Insurance is supplied by a collection of firms who behave strategically and maximize expected profits taking into account that each household's optimal choice of action is a function of the offered contract. The paper provides sufficient conditions for the existence of equilibrium and shows that the appropriate versions of both welfare theorems hold.

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    Bibliographic Info

    Article provided by Springer in its journal Economic Theory.

    Volume (Year): 18 (2001)
    Issue (Month): 3 ()
    Pages: 555-575

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    Handle: RePEc:spr:joecth:v:18:y:2001:i:3:p:555-575

    Note: Received: December 7, 1998; revised version: October 25, 1999
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    Web page: http://link.springer.de/link/service/journals/00199/index.htm

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    Related research

    Keywords: Moral hazard; General equilibrium; Welfare theorems.;

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    Cited by:
    1. Martine Quinzii & Michael Magill, 2007. "The Probability Approach To General Equilibrium With Production," Working Papers 83, University of California, Davis, Department of Economics.
    2. Calcagno, Riccardo & Wagner, Wolf, 2006. "Dispersed initial ownership and the efficiency of the stock market under moral hazard," Journal of Mathematical Economics, Elsevier, vol. 42(1), pages 36-45, February.
    3. Magill, Michael & Quinzii, Martine, 2002. "Capital market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 149-190, September.
    4. Martine Quinzii & Michael Magill, 1900. "Normative Properties Of Stock Market Equilibrium With Moral Hazard," Working Papers 82, University of California, Davis, Department of Economics.
    5. Martin Hellwig, 2004. "Nonlinear Incentive Provision in Walrasian Markets: A Cournot Convergence Approach," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2004_8, Max Planck Institute for Research on Collective Goods.
    6. Kilenthong, Weerachart T. & Townsend, Robert M., 2011. "Information-constrained optima with retrading: An externality and its market-based solution," Journal of Economic Theory, Elsevier, vol. 146(3), pages 1042-1077, May.

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