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Moral hazard and linear contracts : Economies with idiosyncratic risks

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  • CITANNA, Alessandro

Abstract

In exchange economies where moral hazard affects the distribution of individual risks, we study the viability of linear nonexclusive contracts. It is shown that the linearity in prices and payoffs is compatible with the presence of moral hazard when coupled with a simple participation fee. More specifically, we prove existence of competitive equilibrium when individuals exchange the contracts. The participation fee can be seen as a form of sharing the profits and losses of an insurance company offering such contracts. The contracts can be given the more general interpretation of financial assets in markets where the unverifiability of trades is widespread. The asset prices are such that financial markets may be "incomplete" at equilibrium.

Suggested Citation

  • CITANNA, Alessandro, 2000. "Moral hazard and linear contracts : Economies with idiosyncratic risks," HEC Research Papers Series 699, HEC Paris.
    • Handle: RePEc:ebg:heccah:0699
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    Cited by:

    1. Calcagno, Riccardo & Wagner, Wolf, 2006. "Dispersed initial ownership and the efficiency of the stock market under moral hazard," Journal of Mathematical Economics, Elsevier, vol. 42(1), pages 36-45, February.

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    More about this item

    Keywords

    Moral hazard; competitive equilibrium; financial markets; insurance;
    All these keywords.

    JEL classification:

    • C62 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Existence and Stability Conditions of Equilibrium
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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