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The inefficiency of the stock market equilibrium under moral hazard

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Author Info
Calcagno, R.
Wagner, W. (Tilburg University, Center for Economic Research)

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Abstract

In this paper we study the constrained efficiency of a stock market equilibrium under moral hazard. We extend a standard general equilbrium framework (Magill and Quinzii (1999) and (2002)) to allow for a more general initial ownership distribution. We show that the market allocation is constrained efficient only if in each firm the entrepreneur who generates payoffs through unobservable effort has full initial property rights to his firm. This result holds even if the market can anticipate correctly the optimal effort choice of each entrepreneur from their observable financing decisions.

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Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 107.

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Date of creation: 2003
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Handle: RePEc:dgr:kubcen:2003107

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  1. Wagner, W., 2002. "Divestment, entrepreneurial incentives and the decision to go public," Discussion Paper 47, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Kocherlakota, Narayana R., 1998. "The effects of moral hazard on asset prices when financial markets are complete," Journal of Monetary Economics, Elsevier, vol. 41(1), pages 39-56, February. [Downloadable!] (restricted)
  3. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  4. Kihlstrom, Richard E. & Matthews, Steven A., 1990. "Managerial incentives in an entrepreneurial stock market model," Journal of Financial Intermediation, Elsevier, vol. 1(1), pages 57-79, March. [Downloadable!] (restricted)
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  5. Michael Magill & Martine Quinzii, . "Incentives And Risk Sharing In A Stock Market Equilibrium," Department of Economics 96-12, California Davis - Department of Economics. [Downloadable!]
  6. Pradeep Dubey & John Geanakoplos, 2001. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," Cowles Foundation Discussion Papers 1346R2, Cowles Foundation, Yale University, revised Feb 2002. [Downloadable!]
  7. Pradeep Dubey & John Geanakoplos, 2002. "Competitive Pooling: Rothschild-Stiglitz Reconsidered," The Quarterly Journal of Economics, MIT Press, vol. 117(4), pages 1529-1570, November. [Downloadable!] (restricted)
  8. Magill, Michael & Quinzii, Martine, 2002. "Capital market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 149-190, September. [Downloadable!] (restricted)
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