Moral hazard and linear contracts : Economies with idiosyncratic risks
AbstractIn exchange economies where moral hazard affects the distribution of individual risks, we study the viability of linear nonexclusive contracts. It is shown that the linearity in prices and payoffs is compatible with the presence of moral hazard when coupled with a simple participation fee. More specifically, we prove existence of competitive equilibrium when individuals exchange the contracts. The participation fee can be seen as a form of sharing the profits and losses of an insurance company offering such contracts. The contracts can be given the more general interpretation of financial assets in markets where the unverifiability of trades is widespread. The asset prices are such that financial markets may be "incomplete" at equilibrium.
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Bibliographic InfoPaper provided by HEC Paris in its series Les Cahiers de Recherche with number 699.
Length: 28 pages
Date of creation: 01 Jan 2000
Date of revision:
Moral hazard; competitive equilibrium; financial markets; insurance;
Find related papers by JEL classification:
- C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
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