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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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Article provided by Springer 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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  1. Bryan Ellickson and Birgit Grodal, Suzanne Scotchmer, and William R.Zame., 1997. "Clubs and the Market: Large Finite Economies," Economics Working Papers 97-255, University of California at Berkeley.
  2. Edward Simpson Prescott & Robert M. Townsend, 2006. "Firms as Clubs in Walrasian Markets with Private Information," Journal of Political Economy, University of Chicago Press, vol. 114(4), pages 644-671, August.
  3. Belén Jerez, 2003. "Incentive Compatibility And Pricing Under Moral Hazard," Economics Working Papers we035722, Universidad Carlos III, Departamento de Economía.
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  8. Champsaur, Paul & Dreze, Jacques H & Henry, Claude, 1977. "Stability Theorems with Economic Applications," Econometrica, Econometric Society, vol. 45(2), pages 273-94, March.
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  10. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  11. Piero Gottardi & Belén Jerez, 2007. "Comment on "Bertrand and Walras Equilibria under Moral Hazard"," Journal of Political Economy, University of Chicago Press, vol. 115(5), pages 893-900, October.
  12. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, vol. 21(1), pages 3-16, January.
  13. Cole, Harold Linh, 1989. "General Competitive Analysis in an Economy with Private Information: Comment," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 30(1), pages 249-52, February.
  14. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series 1504, CESifo Group Munich.
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