Futures market: contractual arrangement to restrain moral hazard in teams

Joon Song

Economic Theory, 2012, vol. 51, issue 1, 163-189

Abstract: Holmstrom (Bell J Econ 13:324–340, 1982 ) argues that a principal is required to restrain moral hazard in a team: wasting output in certain states is required to enforce efficient effort, and the principal is a commitment device for the waste. Under competition in commodity and team-formation markets, I extend his model à la Prescott and Townsend (Econometrica 52(1):21–45, 1984 ) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market takes the place of a principal as a commitment device. Exploiting the duality of linear programming, I characterize the market environment and the contractual agreements for incentive-constrained efficiency. Copyright Springer-Verlag 2012

Keywords: Team; Contract theory; Futures market; Duality of linear programming; C68; D50; D53; D86 (search for similar items in EconPapers)
Date: 2012
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Working Paper: Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams (2007)
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DOI: 10.1007/s00199-010-0600-8

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