Moral hazard and linear contracts: Economies with idiosyncratic risks

Alessandro Citanna

No 699, HEC Research Papers Series from HEC Paris

Abstract: In exchange economies where moral hazard affects the distribution of individual risks, we study the viability of linear nonexclusive contracts. It is shown that the linearity in prices and payoffs is compatible with the presence of moral hazard when coupled with a simple participation fee. More specifically, we prove existence of competitive equilibrium when individuals exchange the contracts. The participation fee can be seen as a form of sharing the profits and losses of an insurance company offering such contracts. The contracts can be given the more general interpretation of financial assets in markets where the unverifiability of trades is widespread. The asset prices are such that financial markets may be "incomplete" at equilibrium.

Keywords: Moral hazard; competitive equilibrium; financial markets; insurance (search for similar items in EconPapers)
JEL-codes: C62 D50 D82 G22 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2000-01-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:0699

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