IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Information-constrained optima with retrading: An externality and its market-based solution

  • Kilenthong, Weerachart T.
  • Townsend, Robert M.

This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price-islands, created endogenously in equilibrium.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL:
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 146 (2011)
Issue (Month): 3 (May)
Pages: 1042-1077

in new window

Handle: RePEc:eee:jetheo:v:146:y:2011:i:3:p:1042-1077
Contact details of provider: Web page:

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. John C. Fellingham & Young K. Kwon & D. Paul Newman, 1984. "Ex ante Randomization in Agency Models," RAND Journal of Economics, The RAND Corporation, vol. 15(2), pages 290-301, Summer.
  2. Franklin Allen & Douglas Gale, 2004. "Financial Intermediaries and Markets," Econometrica, Econometric Society, vol. 72(4), pages 1023-1061, 07.
  3. Alberto Bennardo & Pierre-Andre Chiappori, 2003. "Bertrand and Walras Equilibria under Moral Hazard," Journal of Political Economy, University of Chicago Press, vol. 111(4), pages 785-817, August.
  4. Guido Lorenzoni, 2007. "Inefficient Credit Booms," NBER Working Papers 13639, National Bureau of Economic Research, Inc.
  5. Emmanuel Farhi & Mikhail Golosov & Aleh Tsyvinski, 2007. "A Theory of Liquidity and Regulation of Financial Intermediation," NBER Working Papers 12959, National Bureau of Economic Research, Inc.
  6. Alberto Bisin & John Geanakoplos & Piero Gottardi & Enrico Minelli & Heracles Polemarchakis, 2009. "Markets and Contracts," Working Papers 0915, University of Brescia, Department of Economics.
  7. Ricardo Caballero & Arvind Krishnamurthy, 2001. "Smoothing Sudden Stops," NBER Working Papers 8427, National Bureau of Economic Research, Inc.
  8. 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.
  9. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 229-264.
  10. Tsyvinski, A. & Golosov, M., 2004. "Optimal Taxation with Endogenous Insurance Markets," 2004 Meeting Papers 124, Society for Economic Dynamics.
  11. Edward Simpson Prescott & Robert M. Townsend, 2000. "Firms as clubs in Walrasian markets with private information," Working Paper 00-08, Federal Reserve Bank of Richmond.
  12. Caballero, Ricardo J. & Krishnamurthy, Arvind, 2001. "International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, Elsevier, vol. 48(3), pages 513-548, December.
  13. J C Fellingham & Y K Kwon & D P Newman, 2010. "Ex Ante Randomization in Agency Models," Levine's Working Paper Archive 1953, David K. Levine.
  14. Mikhail Golosov & Aleh Tsyvinski, 2007. "Optimal Taxation with Endogenous Insurance Markets," The Quarterly Journal of Economics, Oxford University Press, vol. 122(2), pages 487-534.
  15. Edward C Prescott & Robert M Townsend, 1997. "General Competitive Analysis in an Economy with Private Information," Levine's Working Paper Archive 1578, David K. Levine.
  16. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  17. Yamazaki, Akira, 1978. "An Equilibrium Existence Theorem without Convexity Assumptions," Econometrica, Econometric Society, vol. 46(3), pages 541-55, May.
  18. Marcos B. Lisboa, 2001. "Moral hazard and general equilibrium in large economies," Economic Theory, Springer, vol. 18(3), pages 555-575.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:eee:jetheo:v:146:y:2011:i:3:p:1042-1077. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.