Futures Market: Contractual Arrangement to Restrain Moral Hazard in Teams

Joon Song

Economics Discussion Papers from University of Essex, Department of Economics

Abstract: Holmstrom (1982) argues that a principal is required to restrain moral hazard in a team: wasting output in a certain state is required to enforce efficient effort, and the principal is a commitment device for such enforcement. Under competition in commodity and team-formation markets, I extend his model a la Prescott and Townsend (1984) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market replaces the role of principals. An important feature of such contracts is exclusiveness: private access to the futures market by team members is now allowed. The duality of linear programming is exploited to characterize a market environment and the contractual agreements for efficiency.

Keywords: general equilibrium; team; contract theory; futures market; duality of linear programming (search for similar items in EconPapers)
Date: 2007
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Journal Article: Futures market: contractual arrangement to restrain moral hazard in teams (2012)
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