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The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market

  • Árpád Ábrahám

    (Duke University,)

  • Nicola Pavoni

    (University College London and Institute for Fiscal Studies,)

In this paper, we describe the properties of the optimal allocation of consumption in a world with moral hazard and hidden borrowing and lending. We discuss how and under what conditions the efficient allocation can be distinguished from that of the permanent income (self-insurance) model. We also compare our allocation with the complete markets (full information) case, and with the standard moral hazard model with monitorable and fully contractible asset holdings. (JEL: D82, E21) Copyright (c) 2005 The European Economic Association.

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Article provided by MIT Press in its journal Journal of the European Economic Association.

Volume (Year): 3 (2005)
Issue (Month): 2-3 (04/05)
Pages: 370-381

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Handle: RePEc:tpr:jeurec:v:3:y:2005:i:2-3:p:370-381
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