Moral Hazard, Aggregate Risk and Nominal Linear Financial Contracts

Citanna Alessandro and Archishman Chakraborty

No 683, HEC Research Papers Series from HEC Paris

Abstract: We study competitive equilibria with moral hazard in economies with aggregate risk and where trading occurs with an incomplete set of financial assets. The main conclusion of the paper is that, contrary to the individual risk economies, moral hazard is compatible with trading in competitive linear financial contracts, and gives rise to no manipulation problem. We establish existence of nonmanipulable equilibria provided that there are no relative price effects (e.g., a one-commoditiy economy), and that financial markets display nonlinearly homogeneous payoffs (e.g., nominal), and are sufficiently incomplete. Finally, we justify the linear contract as the optimal pricing schedule in a specific trading game with an auctioneer.

Keywords: moral hazard; linear contracts (search for similar items in EconPapers)
JEL-codes: D50 D82 (search for similar items in EconPapers)
Pages: 31 pages
Date: 1999-09-14
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Related works:
Working Paper: Moral Hazard, Aggregate Risk and Nominal, Linear Financial Contracts (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0683

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