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Bertrand and Walras Equilibria Under Moral Hazard

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  • Bennardo, Alberto
  • Chiappori, Pierre-André

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 C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 3650.

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Date of creation: Nov 2002
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Handle: RePEc:cpr:ceprdp:3650

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Keywords: competition; moral hazard; rationing;

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References

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  1. Alberto Bisin & Danilo Guaitoli, 1998. "Moral hazard and non-exclusive contracts," Economics Working Papers 345, Department of Economics and Business, Universitat Pompeu Fabra.
  2. Arnott, R. & Stiglitz, J., 1994. "Price Equilibrium, Efficiency, and Decentralizability in Insurance Markets with Moral Hazard," Papers 05, Laval - Laboratoire Econometrie.
  3. Dreze, Jacques, 1975. "Existence of an exchange equilibrium under price rigidities," Open Access publications from Université catholique de Louvain info:hdl:2078.1/88097, Université catholique de Louvain.
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  10. 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.
  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. Arnott, Richard J & Stiglitz, Joseph E, 1988. " The Basic Analytics of Moral Hazard," Scandinavian Journal of Economics, Wiley Blackwell, vol. 90(3), pages 383-413.
  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.
  14. 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.
  15. Guesnerie, R., 1990. "The Arrow-Debreu Paradigm Faced with Modern Theories of Contracting: A Discussion of Selected Issues Involving Information and Time," DELTA Working Papers 90-26, DELTA (Ecole normale supérieure).
  16. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June.
  17. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February.
  18. Gjesdal, Froystein, 1982. "Information and Incentives: The Agency Information Problem," Review of Economic Studies, Wiley Blackwell, vol. 49(3), pages 373-90, July.
  19. 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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