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Bertrand and Walras Equilibria Under Moral Hazard

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  • Alberto Bennardo
  • Pierre-Andre Chiappori

Abstract

We consider a simple model of competition under moral hazard with constant return technologies. We consider preferences that are not separable in effort: marginal utility of income is assumed to increase with leisure, especially for high-income levels. We show that, in this context, Bertrand competition may result in positive equilibrium profit. This result holds for purely idiosyncratic shocks when only deterministic contracts are considered, and extends to unrestricted contract spaces in the presence of aggregate uncertainty. Finally, these findings have important consequences upon the definition of an equilibrium. We show that, in this context, a Walrasian general equilibrium a la Prescott-Townsend may fail to exist: any 'equilibrium' must involve rationing.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 618897000000000748.

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Date of creation: 30 Apr 2003
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Handle: RePEc:cla:levarc:618897000000000748

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  4. Edward C Prescott & Robert M Townsend, 2010. "Pareto Optima and Competitive Equilibria With Adverse Selection and Moral Hazard," Levine's Working Paper Archive 2069, David K. Levine.
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  8. Richard Arnott & Joseph E Stiglitz, 2010. "Randomization with Asymmetric Information," Levine's Working Paper Archive 2054, David K. Levine.
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  10. Gjesdal, Froystein, 1982. "Information and Incentives: The Agency Information Problem," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 373-90, July.
  11. Edward Simpson Prescott & Robert M. Townsend, 1996. "Theory of the firm: applied mechanism design," Working Paper 96-02, Federal Reserve Bank of Richmond.
  12. Douglas Gale, 1996. "Equilibria and Pareto optima of markets with adverse selection (*)," Economic Theory, Springer, vol. 7(2), pages 207-235.
  13. Bisin, A. & Guaitoli, D., 1998. "Moral Hazard and Non-Exclusive Contracts," Working Papers 98-24, C.V. Starr Center for Applied Economics, New York University.
  14. Richard Arnott & Joseph Stiglitz, 1993. "Price Equilibrium, Efficiency, And Decentralizability In Insurance Markets With Moral Hazard," Boston College Working Papers in Economics 254, Boston College Department of Economics.
  15. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June.
  16. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  17. Dreze, Jacques H, 1975. "Existence of an Exchange Equilibrium under Price Rigidities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 301-20, June.
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Citations

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Cited by:
  1. 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.
  2. Belén Jerez, 2003. "Incentive Compatibility And Pricing Under Moral Hazard," Economics Working Papers we035722, Universidad Carlos III, Departamento de Economía.
  3. 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.
  4. 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.
  5. Alberto Bisin & Piero Gottardi & Adriano A. Rampini, 2008. "Managerial Hedging and Portfolio Monitoring," Journal of the European Economic Association, MIT Press, vol. 6(1), pages 158-209, 03.
  6. Joon Song, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 650, University of Essex, Department of Economics.
  7. Ingela Alger & Jörgen W. Weibull, 2007. "Family ties, incentives and development: A model of coerced altruism," Carleton Economic Papers 07-10, Carleton University, Department of Economics, revised 2008.
  8. J. H. Abbring & P.-A. Chiappori & J. J. Heckman & J. Pinquet, 2002. "Testing for Moral Hazard on Dynamic Insurance Data," THEMA Working Papers 2002-24, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise.
  9. Bennardo, Alberto & Piccolo, Salvatore, 2005. "Competitive Markets with Endogenous Health Risks," CEPR Discussion Papers 5385, C.E.P.R. Discussion Papers.
  10. Martine Quinzii & Michael Magill, 1900. "Normative Properties Of Stock Market Equilibrium With Moral Hazard," Working Papers 82, University of California, Davis, Department of Economics.
  11. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series 1504, CESifo Group Munich.
  12. Schlee, Edward & Chade, Hector, 2012. "Optimal insurance with adverse selection," Theoretical Economics, Econometric Society, vol. 7(3), September.
  13. Jerez, Belen, 2003. "A dual characterization of incentive efficiency," Journal of Economic Theory, Elsevier, vol. 112(1), pages 1-34, September.

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