Moral hazard and general equilibrium in large economies

Marcos B. Lisboa ()
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Marcos B. Lisboa: Escola da Pós-Graduação em Economia, Fundação Getúlio Vargas, Rio de Janeiro, RJ 22253-900, BRAZIL

Economic Theory, 2001, vol. 18, issue 3, 555-575

Abstract: The paper analyzes a two period general equilibrium model with individual risk, aggregate uncertainty and moral hazard. There is a large number of households, each facing two individual states of nature in the second period. These states differ solely in the household's vector of initial endowments, which is strictly larger in the first state (good state) than in the second state (bad state). In the first period each household chooses a non-observable action. Higher levels of action give higher probability of the good state of nature to occur, but lower levels of utility. Households' utilities are assumed to be separable in action and the aggregate uncertainty is independent of the individual risk. Insurance is supplied by a collection of firms who behave strategically and maximize expected profits taking into account that each household's optimal choice of action is a function of the offered contract. The paper provides sufficient conditions for the existence of equilibrium and shows that the appropriate versions of both welfare theorems hold.

Keywords: Moral hazard; General equilibrium; Welfare theorems. (search for similar items in EconPapers)
JEL-codes: D52 D61 D82 (search for similar items in EconPapers)
Date: 2001-06-11
Note: Received: December 7, 1998; revised version: October 25, 1999
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Citations: View citations in EconPapers (20)

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