The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market

Arpad J. Abraham () and Nicola Pavoni ()

Journal of the European Economic Association, 2005, vol. 3, issue 2-3, pages 370-381

Abstract: In this paper, we describe the properties of the optimal allocation of consumption in a world with moral hazard and hidden borrowing and lending. We discuss how and under what conditions the efficient allocation can be distinguished from that of the permanent income (self-insurance) model. We also compare our allocation with the complete markets (full information) case, and with the standard moral hazard model with monitorable and fully contractible asset holdings. (JEL: D82, E21) Copyright (c) 2005 The European Economic Association.

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