Information and Economic Efficiency
AbstractIs an economy with adverse selection, moral hazard, or an incomplete set of risk markets "constrained" Pareto efficient? There are two sets of papers addressing this question, one asserting that, under seemingly quite general conditions, the economy is constrained Pareto efficient, the other (to which we have contributed) that it is not. In this paper, we delineate the differences in assumptions between the two sets of papers, and under our assumptions present an intuitive proof of the Pareto inefficiency of market equilibrium with moral hazard and identify what it is that the government can do that the market cannot.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4533.
Date of creation: Nov 1993
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Publication status: published as Information Economics and Policy Vol. 6 (1994), pp. 77-88
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- Edward C Prescott & Robert M Townsend, 2010.
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Levine's Working Paper Archive
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Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University
863, Cowles Foundation for Research in Economics, Yale University.
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- Grossman, Sanford J., 1977. "A characterization of the optimality of equilibrium in incomplete markets," Journal of Economic Theory, Elsevier, Elsevier, vol. 15(1), pages 1-15, June.
- Greenwald, Bruce C & Stiglitz, Joseph E, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 101(2), pages 229-64, May.
- Arnott, Richard J & Stiglitz, Joseph E, 1985. "Labor Turnover, Wage Structures, and Moral Hazard: The Inefficiency of Competitive Markets," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 3(4), pages 434-62, October.
- Newbery, David M G & Stiglitz, Joseph E, 1982. "The Choice of Techniques and the Optimality of Market Equilibrium with Rational Expectations," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(2), pages 223-46, April.
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