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A Note on the Convergence to Competitive Equilibria in Economies with Moral Hazard

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  • Bisin, Alberto
  • Gottardi, P.
  • Guaitoli, D.

Abstract

We examine the conditions under which competitive equilibria can be obtained as the limit, when the number of strategic traders gets large, of Nash equilibria in economies with asymmetric information on agents' effort and possibly imperfect observability of agents' trades. Convergence always occur when either effort is publicly observed (no matter what is the information available to intermediaries on agents' trades); or effort is private information but agents' trades are perfectly observed; or no information at all is available on agents' trades. On the other hand, when each intermediary can observe its trades with an agent, but not the agent's trades with other intermediaries, the (Nash) equilibria with strategic intermediaries do not converge to any of the competitive equilibria, for an open set of economies. The source of the difficulties for convergence is the combination of asymmetric information and the restrictions on the observability of trades which prevent the formation of exclusive contractual relationships and generate barriers to entry in the markets for contracts.
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Suggested Citation

  • Bisin, Alberto & Gottardi, P. & Guaitoli, D., 1998. "A Note on the Convergence to Competitive Equilibria in Economies with Moral Hazard," Working Papers 98-41, C.V. Starr Center for Applied Economics, New York University.
    • Handle: RePEc:cvs:starer:98-41
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    1. Bisin, A. & Geanakoplos, J.D. & Gottardi, P. & Minelli, E. & Polemarchakis, H., 2011. "Markets and contracts," Journal of Mathematical Economics, Elsevier, vol. 47(3), pages 279-288.
    2. Bruno Biais & David Martimort & Jean-Charles Rochet, 2000. "Competing Mechanisms in a Common Value Environment," Econometrica, Econometric Society, vol. 68(4), pages 799-838, July.
    3. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1989.
    4. Douglas Gale, 1992. "A Walrasian Theory of Markets with Adverse Selection," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(2), pages 229-255.
    5. 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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    Cited by:

    1. Alberto Bisin & Piero Gottardi, 2003. "Competitive Markets for Non-Exclusive Contracts with Adverse Selection: the Role of Entry Fees," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(2), pages 313-338, April.
    2. Roozbeh Hosseini, 2015. "Adverse Selection in the Annuity Market and the Role for Social Security," Journal of Political Economy, University of Chicago Press, vol. 123(4), pages 941-984.

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    More about this item

    Keywords

    asymmetric information; exclusivity; convergence;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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