Capital market equilibrium with moral hazard and flexible technology
AbstractMagill and Quinzii show that for any economy for which the state space is technological (the vector of firms' outputs distinguishes states), there is a security structure consisting of the riskless bond, the equity of each firm, an index of equity contracts and an appropriately-chosen family of options under which the market structure satisfies the First and Second Welfare Theorems. The object of the present paper is to extend the analysis of Magill and Quinzii to the case of a stochastic production function with multiple inputs. We show that the conflict between the market structure satisfies the First and Second Welfare Theorems if and only if, for each firm, the number of linearly independent combinations of securities having payoffs correlated with, but not dependent on, the firms output is equal to the number of degrees of freedom in the firm's production technology.
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Bibliographic InfoPaper provided by Risk and Sustainable Management Group, University of Queensland in its series Risk & Uncertainty Working Papers with number WPR04_9.
Date of creation: Sep 2004
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state-contingent production; moral hazard;
Other versions of this item:
- Quiggin, John & Chambers, Robert G., 2006. "Capital market equilibrium with moral hazard and flexible technology," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 358-363, June.
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
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- Magill, Michael & Quinzii, Martine, 2002. "Capital market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 38(1-2), pages 149-190, September.
- Holmstrom, Bengt & Milgrom, Paul, 1987.
"Aggregation and Linearity in the Provision of Intertemporal Incentives,"
Econometric Society, vol. 55(2), pages 303-28, March.
- Bengt Holmstrom & Paul R. Milgrom, 1985. "Aggregation and Linearity in the Provision of Intertemporal Incentives," Cowles Foundation Discussion Papers 742, Cowles Foundation for Research in Economics, Yale University.
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