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Moral hazard and non-exclusive contracts

  • Alberto Bisin
  • Danilo Guaitoli

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 Department of Economics and Business, Universitat Pompeu Fabra in its series Economics Working Papers with number 345.

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Date of creation: Jun 1998
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Handle: RePEc:upf:upfgen:345
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  1. 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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  12. Bisin, Alberto & Gottardi, Piero, 1999. "Competitive Equilibria with Asymmetric Information," Journal of Economic Theory, Elsevier, vol. 87(1), pages 1-48, July.
  13. Robert Gibbons, 1996. "Incentives and Careers in Organizations," NBER Working Papers 5705, National Bureau of Economic Research, Inc.
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  20. 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 329-49, September.
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  24. Bizer, David S & DeMarzo, Peter M, 1992. "Sequential Banking," Journal of Political Economy, University of Chicago Press, vol. 100(1), pages 41-61, February.
  25. 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.
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  27. 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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