IDEAS home Printed from
   My bibliography  Save this paper

Risk-Sharing Partners with Bilateral Moral Hazard and Balanced Budgets



In this paper we study the problem of optimal risk sharing in a model of partnership with bilateral moral hazard and balanced budgets. In our model, there are two risk-averse agents who engage in independent productions and share the aggregate output. Each agent's production requires an effort which is unobservable to the other agent. Moreover, the agents face a resource constraint which imposes that their total consumption cannot exceed the aggregate output. We show that with bilateral moral hazard, the dependence of consumptions on outputs still occurs only through the likelihood ratios, as in standard agency models. We give sufficient conditions for a first-order approach to bilateral incentive compatibility, which allows us to derive some monotonicity results concerning the optimal trading schemes. We take a computational approach to find that the budget balancing constraint may significantly affect the structure of optimal tradings. For instance, when at least one non-negativity constraint is binding, an agent is required to make a higher effort when he is entitled to a higher expected utility, whereas the converse holds in the case where no non-negativity constraint binds. We examine how the equilibrium trades differ with dominant strategy and Nash incentive compatibility.

Suggested Citation

  • Sonia DiGiannatale & Stephen Spear & Cheng Wang, "undated". "Risk-Sharing Partners with Bilateral Moral Hazard and Balanced Budgets," GSIA Working Papers 1999-E4, Carnegie Mellon University, Tepper School of Business.
  • Handle: RePEc:cmu:gsiawp:263

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cmu:gsiawp:263. 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: (Steve Spear). General contact details of provider: .

    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.

    We have no references for this item. You can help adding them by using 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.