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Moral hazard and linear contracts : Economies with idiosyncratic risks

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Author Info
CITANNA, Alessandro
Abstract

In 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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Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 699.

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Length: 28 pages
Date of creation: 01 Jan 2000
Date of revision:
Handle: RePEc:ebg:heccah:0699

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Related research
Keywords: Moral hazard; competitive equilibrium; financial markets; insurance;

Find related papers by JEL classification:
C62 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming - - - Existence and Stability Conditions of Equilibrium
D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information
G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies

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  1. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  2. Smale, S., 1974. "Global analysis and economics IIA : Extension of a theorem of Debreu," Journal of Mathematical Economics, Elsevier, vol. 1(1), pages 1-14, March. [Downloadable!] (restricted)
  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. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
    Other versions:
  5. MINELLI, Enrico & POLEMARCHAKIS, Heracles & ,, 1999. "Nash-Walras equilibria of a large economy ," CORE Discussion Papers 1999043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE). [Downloadable!]
  6. 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)
  7. 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. [Downloadable!] (restricted)
  8. Harald Uhlig, 1996. "A law of large numbers for large economies (*)," Economic Theory, Springer, vol. 8(1), pages 41-50.
  9. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation, Yale University, revised Feb 1989. [Downloadable!]
  10. Malinvaud, E, 1973. "Markets for an Exchange Economy with Individual Risks," Econometrica, Econometric Society, vol. 41(3), pages 383-410, May. [Downloadable!] (restricted)
  11. Cass, David & Chichilnisky, Graciela & Wu, Ho-Mou, 1996. "Individual Risk and Mutual Insurance," Econometrica, Econometric Society, vol. 64(2), pages 333-41, March. [Downloadable!] (restricted)
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