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Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams

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  • Joon Song

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Abstract

Holmstrom (1982) argues that a principal is required to restrain moral hazard in a team: wasting output in a certain state is required to enforce efficient effort, and the principal is a commitment device for such enforcement. Under competition in commodity and team-formation markets, I extend his model a la Prescott and Townsend (1984) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market replaces the role of principals. An important feature of such contracts is exclusiveness: private access to the the futures market by team members is not allowed. The duality of linear programming is exploited to characterize a market environment and the contractual agreements for efficiency.

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Paper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 633.

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Date of creation: 17 Jul 2007
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Handle: RePEc:esx:essedp:633

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  1. Edward S. Prescott & Robert M. Townsend, 2000. "Firms as clubs in Walrasian markets with private information," Working Paper 00-08, Federal Reserve Bank of Richmond.
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Cited by:
  1. Belén Jerez, 2012. "Competitive equilibrium with search frictions : a general equilibrium approach," Economics Working Papers we1235, Universidad Carlos III, Departamento de Economía.
  2. Joon Song, 2007. "Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams," Economics Discussion Papers 633, University of Essex, Department of Economics.

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