Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution

Weerachart Kilenthong and Robert Townsend

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price islands, created endogenously in equilibrium.

Keywords: Externalities; Private information; Moral hazard; Retrading; Walrasian equilibrium; Constrained efficiency; Decentralization (search for similar items in EconPapers)
JEL-codes: D51 D61 D62 D82 (search for similar items in EconPapers)
Date: 2010-02-01
New Economics Papers: this item is included in nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/20725/1/MPRA_paper_20725.pdf original version (application/pdf)

Related works:
Journal Article: Information-constrained optima with retrading: An externality and its market-based solution (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:20725

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().