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General equilibrium with endogenous securities and moral hazard

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  • Luis Braido

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Abstract

This paper studies a class of general equilibrium economies in which the individuals’ endowments depend on privately observed effort choices and the financial markets are endogenous. The environment is modeled as a two-stage game. Individuals first make strategic financial-innovation decisions. They then act in a Radner-type economy with the previously designed securities. Consumption goods, portfolios, and effort levels are chosen competitively (i.e., taking prices as given). An equilibrium concept is adapted for these moral hazard economies and its existence is proven. It is shown through an example how incentive motives might lead to the endogenous emergence of financial incompleteness. Copyright Springer-Verlag Berlin/Heidelberg 2005

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File URL: http://hdl.handle.net/10.1007/s00199-004-0492-6
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 26 (2005)
Issue (Month): 1 (07)
Pages: 85-101

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Handle: RePEc:spr:joecth:v:26:y:2005:i:1:p:85-101

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Related research

Keywords: General equilibrium; Moral hazard; Endogenous incomplete markets; Non-exclusive securities.;

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Cited by:
  1. Marta Faias, 2008. "Approximate equilibrium in pure strategies for a two-stage game of asset creation," Decisions in Economics and Finance, Springer, vol. 31(2), pages 117-136, November.
  2. Braido, Luis H.B., 2009. "Multiproduct price competition with heterogeneous consumers and nonconvex costs," Journal of Mathematical Economics, Elsevier, vol. 45(9-10), pages 526-534, September.
  3. Faias, Marta, 2004. "General equilibrium and endogenous creation of asset markets," FEUNL Working Paper Series wp454, Universidade Nova de Lisboa, Faculdade de Economia.

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