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Bertrand and Walras Equilibria under Moral Hazard

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Author Info
Alberto Bennardo
Pierre-Andre Chiappori

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Abstract

We consider a simple model of competition under moral hazard with constant return technologies. We consider preferences that are not separable in effort: marginal utility of income is assumed to increase with leisure, especially for high income levels. We show that, in this context, Bertrand competition may result in positive equilibrium profit. This result holds for purely idiosyncratic shocks when only deterministic contracts are considered and extends to unrestricted contract spaces in the presence of aggregate uncertainty. Finally, these findings have important consequences on the definition of an equilibrium. We show that, in this context, a Walrasian general equilibrium à la Prescott-Townsend may fail to exist: any "equilibrium" must involve rationing.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 111 (2003)
Issue (Month): 4 (August)
Pages: 785-817
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Handle: RePEc:ucp:jpolec:v:111:y:2003:i:4:p:785-817

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Edward Simpson Prescott & Robert M. Townsend, 1996. "Theory of the firm: applied mechanism design," Working Paper 96-02, Federal Reserve Bank of Richmond. [Downloadable!]
  2. Alberto Bisin & Danilo Guaitoli, 1998. "Moral Hazard and Non-Exclusive Contracts," Economics Working Papers 345, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
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  3. Richard J. Arnott & Joseph E. Stiglitz, 1988. "Randomization with Asymmetric Information," NBER Working Papers 2507, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
  5. Arnott, Richard J & Stiglitz, Joseph E, 1988. " The Basic Analytics of Moral Hazard," Scandinavian Journal of Economics, Blackwell Publishing, vol. 90(3), pages 383-413.
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  6. Prescott, Edward C & Townsend, Robert M, 1984. "Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, Econometric Society, vol. 52(1), pages 21-45, January. [Downloadable!] (restricted)
  7. Jewitt, Ian, 1988. "Justifying the First-Order Approach to Principal-Agent Problems," Econometrica, Econometric Society, vol. 56(5), pages 1177-90, September. [Downloadable!] (restricted)
  8. Malcomson, James M, 1984. "Work Incentives, Hierarchy, and Internal Labor Markets," Journal of Political Economy, University of Chicago Press, vol. 92(3), pages 486-507, June. [Downloadable!] (restricted)
  9. Guesnerie, R., 1990. "The Arrow-Debreu Paradigm Faced with Modern Theories of Contracting: A Discussion of Selected Issues Involving Information and Time," DELTA Working Papers 90-26, DELTA (Ecole normale supérieure).
  10. Shapiro, Carl & Stiglitz, Joseph E, 1984. "Equilibrium Unemployment as a Worker Discipline Device," American Economic Review, American Economic Association, vol. 74(3), pages 433-44, June. [Downloadable!] (restricted)
  11. Helpman, Elhanan & Laffont, Jean-Jacques, 1975. "On moral hazard in general equilibrium theory," Journal of Economic Theory, Elsevier, vol. 10(1), pages 8-23, February. [Downloadable!] (restricted)
  12. Gale, Douglas, 1996. "Equilibria and Pareto Optima of Markets with Adverse Selection," Economic Theory, Springer, vol. 7(2), pages 207-35, February.
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  13. Richard Arnott & Joseph Stiglitz, 1993. "Price Equilibrium, Efficiency, And Decentralizability In Insurance Markets With Moral Hazard," Boston College Working Papers in Economics 254, Boston College Department of Economics.
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  14. Gjesdal, Froystein, 1982. "Information and Incentives: The Agency Information Problem," Review of Economic Studies, Blackwell Publishing, vol. 49(3), pages 373-90, July. [Downloadable!] (restricted)
  15. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January. [Downloadable!] (restricted)
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  16. MacLeod, W Bentley & Malcomson, James M, 1989. "Implicit Contracts, Incentive Compatibility, and Involuntary Unemployment," Econometrica, Econometric Society, vol. 57(2), pages 447-80, March. [Downloadable!] (restricted)
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  17. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September. [Downloadable!] (restricted)
  18. Dreze, Jacques H, 1975. "Existence of an Exchange Equilibrium under Price Rigidities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 16(2), pages 301-20, June. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Piero Gottardi & Alberto Bisin & Adriano Rampini, 2007. "Managerial Hedging and Portfolio Monitoring," Working Papers 2007_24, University of Venice "Ca' Foscari", Department of Economics. [Downloadable!]
    Other versions:
  2. Joon Song, 2008. "Perks: Contractual Arrangements to Restrain Moral Hazard," Economics Discussion Papers 650, University of Essex, Department of Economics. [Downloadable!]
  3. Alberto Bisin & Piero Gottardi, 2005. "Efficient Competitive Equilibria with Adverse Selection," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  4. J. H. Abbring & P.-A. Chiappori & J. J. Heckman & J. Pinquet, 2002. "Testing for Moral Hazard on Dynamic Insurance Data," THEMA Working Papers 2002-24, THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise. [Downloadable!]
  5. Bel? Jerez, 2001. "A Dual Characterization of Incentive Efficiency," UFAE and IAE Working Papers 494.01, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC). [Downloadable!]
    Other versions:
  6. Belén Jerez, 2003. "Incentive Compatibility And Pricing Under Moral Hazard," Economics Working Papers we035722, Universidad Carlos III, Departamento de Economía. [Downloadable!]
    Other versions:
  7. Alger, Ingela & Weibull, Jörgen, 2007. "Family ties, incentives and development: a model of coerced altruism," Working Paper Series in Economics and Finance 681, Stockholm School of Economics. [Downloadable!]
    Other versions:
  8. Jérome Pouyet & Bernard Salanié & Francois Salanié, 2008. "On Competitive Equilibria with Asymmetric Information," Topics in Theoretical Economics, Berkeley Electronic Press, vol. 8(1), pages 1385-1385. [Downloadable!] (restricted)
  9. Hector Chade & Edward Schlee, 2008. "Optimal Insurance with Adverse Selection," Levine's Working Paper Archive 122247000000002175, David K. Levine. [Downloadable!]
  10. Quinzii, Martine & Magill, Michael, 2008. "Normative Properties of Stock Market Equilibrium with Moral Hazard," Working Papers 08-2, University of California at Davis, Department of Economics. [Downloadable!]
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