Inefficiency of competitive equilibrium with hidden action and financial markets

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Inefficiency of competitive equilibrium with hidden action and financial markets

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Luca, PANACCIONE (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)

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Luca Panaccione

Abstract

In this paper, we study a pure exchange economy with idiosyncratic uncertainty, hidden action and multiple consumption goods. We consider two different market structures : contingent markets on the one hand, and financial and spot markets on the other hand. We propose a competitive equilibrium concept for each market structure. We show that the equilibrium with contingent markets is efficient in an appropriate sense, while the equilibrium with financial and spot markets is inefficient, provided that assumptions on preferences more general than those usually considered in the literature hold.

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Paper provided by Université catholique de Louvain, Département des Sciences Economiques in its series Discussion Papers (ECON - Département des Sciences Economiques) with number 2006049.

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Length: 21
Date of creation: 15 Sep 2006
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Handle: RePEc:ctl:louvec:2006049

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Paper
- PANACCIONE, Luca, 2006. "Inefficiency of competitive equilibrium with hidden action and financial markets," CORE Discussion Papers 2006096, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]

Find related papers by JEL classification:
D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

This paper has been announced in the following NEP Reports:

NEP-ALL-2006-12-16 (All new papers)
NEP-DGE-2006-12-16 (Dynamic General Equilibrium)
NEP-MIC-2006-12-16 (Microeconomics)

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.:

Malinvaud, E., 1972. "The allocation of individual risks in large markets," Journal of Economic Theory, Elsevier, vol. 4(2), pages 312-328, April. [Downloadable!] (restricted)
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Other versions:
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Richard J. Arnott & Joseph E. Stiglitz, 1986. "Moral Hazard and Optimal Commodity Taxation," NBER Working Papers 1154, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
Other versions:
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- Arnott, Richard & Stiglitz, Joseph E., 1986. "Moral hazard and optimal commodity taxation," Journal of Public Economics, Elsevier, vol. 29(1), pages 1-24, February. [Downloadable!] (restricted)
Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, vol. 101(2), pages 229-64, May. [Downloadable!] (restricted)
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)
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