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Competitive Equilibrium with Moral Hazard in Economies with Multiple Commodities

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  • CITANNA, Alessandro
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    Abstract

    We study an economy with competitive commodity markets and exclusive pairwise contractual relations with moral hazard, where both the principal and the agent can be risk averse. We show existence of equilibria and their generic constrained suboptimality, by means of a change in the compensation schemes. Such suboptimality occurs provided the number of commodities is sufficiently large relative to the number of states and pair types, and there are at least three future states of the world.

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    File URL: http://www.hec.fr/var/fre/storage/original/application/b1d45ea249b201c25e845412c8a1fbd4.pdf
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    Bibliographic Info

    Paper provided by HEC Paris in its series Les Cahiers de Recherche with number 700.

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    Length: 38 pages
    Date of creation: 01 Jan 2000
    Date of revision:
    Handle: RePEc:ebg:heccah:0700

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    Postal: HEC Paris, 78351 Jouy-en-Josas cedex, France
    Web page: http://www.hec.fr/
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    Related research

    Keywords: General equilibrium; moral hazard; constrained suboptimality;

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    1. Malinvaud, E, 1973. "Markets for an Exchange Economy with Individual Risks," Econometrica, Econometric Society, vol. 41(3), pages 383-410, May.
    2. Sanford J Grossman & Oliver D Hart, 2001. "An Analysis of the Principal-Agent Problem," Levine's Working Paper Archive 391749000000000339, David K. Levine.
    3. 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.
    4. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, vol. 11(3), pages 495-521.
    5. 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.
    6. 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.
    7. Allen, Beth, 1981. "Utility perturbations and the equilibrium price set," Journal of Mathematical Economics, Elsevier, vol. 8(3), pages 277-307, October.
    8. Harald Uhlig, 1996. "A law of large numbers for large economies (*)," Economic Theory, Springer, vol. 8(1), pages 41-50.
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