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The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market

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Author Info

  • Árpád Ábrahám

    (Duke University,)

  • Nicola Pavoni

    (University College London and Institute for Fiscal Studies,)

Abstract

In this paper, we describe the properties of the optimal allocation of consumption in a world with moral hazard and hidden borrowing and lending. We discuss how and under what conditions the efficient allocation can be distinguished from that of the permanent income (self-insurance) model. We also compare our allocation with the complete markets (full information) case, and with the standard moral hazard model with monitorable and fully contractible asset holdings. (JEL: D82, E21) Copyright (c) 2005 The European Economic Association.

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Bibliographic Info

Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 3 (2005)
Issue (Month): 2-3 (04/05)
Pages: 370-381

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Handle: RePEc:tpr:jeurec:v:3:y:2005:i:2-3:p:370-381

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Cited by:
  1. Hassler, John & Rodríguez Mora, José Vicente, 2007. "Unemployment insurance design: inducing moving and retraining," Discussion Paper Series In Economics And Econometrics 0702, Economics Division, School of Social Sciences, University of Southampton.
  2. Afrasiab Mirza, 2012. "Dynamic Prudential Regulation," Discussion Papers 12-13, Department of Economics, University of Birmingham.
  3. Albert Marcet & Ramon Marimon, 2011. "Recursive Contracts," Working Papers 552, Barcelona Graduate School of Economics.
  4. Bertola, Giuseppe & Koeniger, Winfried, 2013. "Hidden Insurance in a Moral Hazard Economy," Economics Working Paper Series 1337, University of St. Gallen, School of Economics and Political Science.
  5. Orazio Attanasio & Nicola Pavoni, 2007. "Risk Sharing in Private Information Models with Asset Accumulation: Explaining the Excess Smoothness of Consumption," NBER Working Papers 12994, National Bureau of Economic Research, Inc.
  6. Hrishikesh D. Vinod, 2008. "Consumer Debt is 130% of Income: Avoiding Budget Constraint Orthodoxy," Fordham Economics Discussion Paper Series dp2008-13, Fordham University, Department of Economics.
  7. Bertola, Giuseppe & Koeniger, Winfried, 2010. "Public and Private Insurance with Costly Transactions," IZA Discussion Papers 5201, Institute for the Study of Labor (IZA).
  8. Benjamin Moll & Robert M. Townsend & Victor Zhorin, 2013. "Financial Obstacles and Inter-Regional Flow of Funds," NBER Working Papers 19618, National Bureau of Economic Research, Inc.

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