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Moral Hazard and Non-Exclusive Contracts

  • Bisin, Alberto
  • Guaitoli, Danilo

This paper studies equilibria for economies characterized by moral hazard (hidden action), in which the set of contracts marketed in equilibrium is determined by the interaction of financial intermediaries. The crucial aspect of the environment that we study is that intermediaries are restricted to trade non-exclusive contracts: the agents' contractual relationships with competing intermediaries cannot be monitored (or are not contractible upon). We fully characterize equilibrium allocations and contracts. In this set-up equilibrium allocations are clearly incentive-constrained inefficient. A robust property of equilibria with non-exclusivity is that the contracts issued in equilibrium do not implement the optimal action. Moreover we prove that, whenever equilibrium contracts do implement the optimal action, intermediaries make positive profits and equilibrium allocations are third best inefficient (where the definition of third best efficiency accounts for constraints which capture the non-exclusivity of contracts).

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1987.

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Date of creation: Oct 1998
Handle: RePEc:cpr:ceprdp:1987
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  4. Bisin, Alberto & Gottardi, Piero, 1997. "General Competitive Analysis with Asymmetric Information," Working Papers 97-38, C.V. Starr Center for Applied Economics, New York University.
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  9. Bisin, Alberto & Gottardi, Piero, 1999. "Competitive Equilibria with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 1-48, July.
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  11. Siamwalla, Ammar, et al, 1990. "The Thai Rural Credit System: Public Subsidies, Private Information, and Segmented Markets," World Bank Economic Review, World Bank Group, vol. 4(3), pages 271-295, September.
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  13. Smith, Clifford Jr. & Warner, Jerold B., 1979. "On financial contracting : An analysis of bond covenants," Journal of Financial Economics, Elsevier, vol. 7(2), pages 117-161, June.
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  19. 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.
  20. Richard Arnott & Joseph Stiglitz, 1991. "Equilibrium in Competitive Insurance Markets with Moral Hazard," NBER Working Papers 3588, National Bureau of Economic Research, Inc.
  21. Bisin, Alberto, 1998. "General Equilibrium with Endogenously Incomplete Financial Markets," Journal of Economic Theory, Elsevier, vol. 82(1), pages 19-45, September.
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  23. Hoff, Karla & Stiglitz, Joseph E., 1998. "Moneylenders and bankers: price-increasing subsidies in a monopolistically competitive market," Journal of Development Economics, Elsevier, vol. 55(2), pages 485-518, April.
  24. Aleem, Irfan, 1990. "Imperfect Information, Screening, and the Costs of Informal Lending: A Study of a Rural Credit Market in Pakistan," World Bank Economic Review, World Bank Group, vol. 4(3), pages 329-349, September.
  25. Al-Najjar, Nabil Ibraheem, 1995. "Decomposition and Characterization of Risk with a Continuum of Random Variables," Econometrica, Econometric Society, vol. 63(5), pages 1195-1224, September.
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  27. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
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