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Futures market: contractual arrangement to restrain moral hazard in teams

  • Joon Song

    ()

Holmstrom (Bell J Econ 13:324–340, 1982 ) argues that a principal is required to restrain moral hazard in a team: wasting output in certain states is required to enforce efficient effort, and the principal is a commitment device for the waste. Under competition in commodity and team-formation markets, I extend his model à la Prescott and Townsend (Econometrica 52(1):21–45, 1984 ) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market takes the place of a principal as a commitment device. Exploiting the duality of linear programming, I characterize the market environment and the contractual agreements for incentive-constrained efficiency. Copyright Springer-Verlag 2012

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File URL: http://hdl.handle.net/10.1007/s00199-010-0600-8
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Article provided by Society for the Advancement of Economic Theory (SAET) in its journal Economic Theory.

Volume (Year): 51 (2012)
Issue (Month): 1 (September)
Pages: 163-189

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Handle: RePEc:spr:joecth:v:51:y:2012:i:1:p:163-189
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