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A Note on Walrasian Equilibria with Moral Hazard and Aggregate Uncertainty

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  • Piero Gottardi

    ()
    (Department of Economics, University Of Venice Ca’ Foscari)

  • Belén Jerez

    (Universidad Carlos III de Madrid)

Abstract

In a fundamental contribution, Prescott and Townsend (1984) [PT] have shown that the existence and efficiency properties of Walrasian equilibria extend to economies with moral hazard, when agents' trades are observable (exclusive contracts can be implemented). More recently, Bennardo and Chiappori (2003) [BC] have argued that Walrasian equilibria may (robustly) fail to exist when the class of moral hazard economies considered by Prescott and Townsend is generalized to allow for the presence of aggregate, in addition to idiosyncratic, uncertainty and for preferences which are nonseparable in consumption and effort. We re-examine here the existence and efficiency properties of Walrasian equilibria in the moral hazard economy considered by Bennardo and Chiappori. We show that Walrasian equilibria always exist in such economy and are incentive efficient, so the results of Prescott and Townsend continue to hold in the more general set-up considered by Bennardo and Chiappori.

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Bibliographic Info

Paper provided by Department of Economics, University of Venice "Ca' Foscari" in its series Working Papers with number 2006_43.

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Length: 10 pages
Date of creation: 2006
Date of revision:
Handle: RePEc:ven:wpaper:2006_43

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Keywords: Moral Hazard; Aggregate Risk; Incentive Efficiency; Walrasian Markets;

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  1. Belen Jerez, 2005. "Incentive Compatibility and Pricing under Moral Hazard," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 8(1), pages 28-47, January.
  2. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, Econometric Society, vol. 52(1), pages 21-45, January.
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