Les Cahiers de Recherche - HEC Paris
No 699:
Moral hazard and linear contracts : Economies with idiosyncratic risks
Alessandro CITANNA
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.
Keywords: Moral hazard; competitive equilibrium; financial markets; insurance; (follow links to similar papers)
JEL-Codes: C62; D50; D82; G22; (follow links to similar papers)
28 pages, January 1, 2000
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