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Moral Hazard and Non-Exclusive Contracts

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Author Info
Bisin, Alberto
Guaitoli, Danilo

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Abstract

This paper studies equilibria for economies characterized by moral hazard (hidden action), in which the set of contracts marketed in equilibrium is determined by the interaction of financial intermediaries. The crucial aspect of the environment that we study is that intermediaries are restricted to trade non-exclusive contracts: the agents' contractual relationships with competing intermediaries cannot be monitored (or are not contractible upon). We fully characterize equilibrium allocations and contracts. In this set-up equilibrium allocations are clearly incentive-constrained inefficient. A robust property of equilibria with non-exclusivity is that the contracts issued in equilibrium do not implement the optimal action. Moreover we prove that, whenever equilibrium contracts do implement the optimal action, intermediaries make positive profits and equilibrium allocations are third best inefficient (where the definition of third best efficiency accounts for constraints which capture the non-exclusivity of contracts).

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1987.

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Date of creation: Oct 1998
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Handle: RePEc:cpr:ceprdp:1987

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Related research
Keywords: Asymmetric Information Efficiency exclusivity

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Find related papers by JEL classification:
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G20 - Financial Economics - - Financial Institutions and Services - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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    Other versions:
  2. Alberto Bisin & Piero Gottardi, 1998. "Competitive Equilibria with Asymmetric Information," Levine's Working Paper Archive 2062, UCLA Department of Economics. [Downloadable!]
    Other versions:
  3. Bisin, Alberto & Gottardi, Piero, 1997. "General Competitive Analysis with Asymmetric Information," Working Papers 97-38, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
    Other versions:
  4. Hoff, Karla & Stiglitz, Joseph E., 1997. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 52(2), pages 429-462, April. [Downloadable!] (restricted)
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  5. Bernheim, B Douglas & Whinston, Michael D, 1986. "Common Agency," Econometrica, Econometric Society, vol. 54(4), pages 923-42, July. [Downloadable!] (restricted)
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  9. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Blackwell Publishing, vol. 58(2), pages 195-209, April. [Downloadable!] (restricted)
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  13. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January. [Downloadable!] (restricted)
  14. Charles M. Kahn & Dilip Mookherjee, 1996. "Competition and Incentives with Non-Exclusive Contracts," Papers 0075, Boston University - Industry Studies Programme.
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  15. J. A. Mirrlees & P. Diamond, 1982. "Social Insurance with Variable Retirement and Private Saving," Working papers 296, Massachusetts Institute of Technology (MIT), Department of Economics.
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  19. Siamwalla, Ammar, et al, 1990. "The Thai Rural Credit System: Public Subsidies, Private Information, and Segmented Markets," World Bank Economic Review, Oxford University Press, vol. 4(3), pages 271-95, September.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Yaron Leitner, 2005. "A theory of an intermediary with nonexclusive contracting," Working Papers 05-12, Federal Reserve Bank of Philadelphia. [Downloadable!]
  2. Andrea Attar & Arnold Chassagnon, 2006. "On moral hazard and nonexclusive contracts," PSE Working Papers 2006-51, PSE (Ecole normale supérieure). [Downloadable!]
  3. Tano Santos & Jose A. Scheinkman, 2001. "Financial Intermediation without Exclusivity," American Economic Review, American Economic Association, vol. 91(2), pages 436-439, May. [Downloadable!] (restricted)
  4. Reich, S., 2007. "Robust Incentives," Cambridge Working Papers in Economics 0729, Faculty of Economics, University of Cambridge. [Downloadable!]
  5. T. Santos & J. Scheinkman, 2000. "Competition Among Exchanges," Princeton Economic Theory Papers 00s12, Economics Department, Princeton University.
    Other versions:
  6. Alberto Bennardo & Pierre-Andre Chiappori, 2003. "Bertrand and Walras Equilibria Under Moral Hazard," Levine's Working Paper Archive 618897000000000748, UCLA Department of Economics. [Downloadable!]
    Other versions:
  7. Heski Bar-Isaac & Vicente Cuñat, 2005. "Long term debt with Hidden Borrowing," Working Papers 05-04, New York University, Leonard N. Stern School of Business, Department of Economics. [Downloadable!]
    Other versions:
  8. Alberto Bisin & Piero Gottardi & Adriano A. Rampini, 2004. "Managerial Hedging and Portfolio Monitoring," CESifo Working Paper Series CESifo Working Paper No. , CESifo GmbH. [Downloadable!]
    Other versions:
  9. Gwenael Piaser, 2005. "Stochastic and deterministic menus in common agency games," Economics Bulletin, Economics Bulletin, vol. 4(11), pages 1-6. [Downloadable!]
  10. 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. [Downloadable!]
    Other versions:
  11. Mikhail Golosov & Aleh Tsyvinski, 2006. "Optimal Taxation with Endogenous Insurance Markets," Levine's Bibliography 784828000000000445, UCLA Department of Economics. [Downloadable!]
    Other versions:
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