Optimal Financial Structure in Exchange Economies
This paper examines the financial arrangements that arise in a simple exchange economy with private information. It uses contr act theory to consider the optimal structures under varying informati onal restrictions. Relative to previous work, it expands the strategy sets of agents, allowing both coalitions and contrived uncertainty ( lotteries). The paper spells out how different information structures lead to different constraints (resource, incentive compatibility, mu ltilateral incentive compatibility) upon the problem, and thus to dif ferent financial contracts (insurance, intermediaries, ex post market s). Multilateral incentive compatibility emerges as particularly powe rful in determining the nature of financial contracts. Copyright 1988 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
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