HEC Research Papers Series,
HEC Paris

Abstract: We study an economy with competitive commodity markets and exclusive pairwise contractual relations with moral hazard, where both the principal and the agent can be risk averse. We show existence of equilibria and their generic constrained suboptimality, by means of a change in the compensation schemes. Such suboptimality occurs provided the number of commodities is sufficiently large relative to the number of states and pair types, and there are at least three future states of the world.

Keywords: General equilibrium; moral hazard; constrained suboptimality

JEL-codes: D51; D52; D82

38 pages, January 2, 2000

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