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Moral Hazard, Aggregate Risk and Nominal, Linear Financial Contracts

Author

Listed:
  • Alessandro Citanna

    (GREGH - Groupement de Recherche et d'Etudes en Gestion à HEC - HEC Paris - Ecole des Hautes Etudes Commerciales - CNRS - Centre National de la Recherche Scientifique)

  • Archishman Chakraborty

    (Department of Economics and Finance - Baruch College [CUNY] - CUNY - City University of New York [New York])

Abstract

We study competitive equilibria with moral hazard in economies with aggregate risk and where trading occurs with an incomplete set of financial assets. The main conclusion of the paper is that, contrary to the individual risk economies, moral hazard is compatible with trading in competitive linear financial contracts, and gives rise to no manipulation problem. We establish existence of nonmanipulable equilibria provided that there are no relative price effects (e.g. a one-commodity economy), and that ...nancial markets display nonlinearly homogeneous payoffs (e.g., nominal), and are sufficiently incomplete. Finally, we justify the linear contract as the optimal pricing schedule in a specific trading game with an auctioneer.

Suggested Citation

  • Alessandro Citanna & Archishman Chakraborty, 1999. "Moral Hazard, Aggregate Risk and Nominal, Linear Financial Contracts," Working Papers hal-00599915, HAL.
    • Handle: RePEc:hal:wpaper:hal-00599915
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Moral Hazard; Aggregate Risk; Linear Contracts;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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