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Inefficiency of competitive equilibrium with hidden action and financial markets

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  • PANACCIONE, Luca

Abstract

In this paper, we study a pure exchange economy with idiosyncratic uncertainty, hidden action and multiple consumption goods.We consider two different market structures: contingent markets on the one hand, and financial and spot markets on the otherhand. We propose a competitive equilibrium concept for each market structure. We show that the equilibrium with contin-gent markets is efficient in an appropriate sense, while the equilibrium with financial and spot markets is inefficient, provided that assumptions on preferences more general than those usually considered in the literature hold.

Suggested Citation

  • PANACCIONE, Luca, 2006. "Inefficiency of competitive equilibrium with hidden action and financial markets," LIDAM Discussion Papers CORE 2006096, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2006096
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    References listed on IDEAS

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    1. Edmond Malinvaud, 1974. "The Allocation of Individual Risks in Large Markets," International Economic Association Series, in: Jacques H. Drèze (ed.), Allocation under Uncertainty: Equilibrium and Optimality, chapter 8, pages 110-125, Palgrave Macmillan.
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    6. Bruce C. Greenwald & Joseph E. Stiglitz, 1986. "Externalities in Economies with Imperfect Information and Incomplete Markets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 101(2), pages 229-264.
    7. Marcos B. Lisboa, 2001. "Moral hazard and general equilibrium in large economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 555-575.
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    Cited by:

    1. Magill, Michael & Quinzii, Martine, 2008. "Normative properties of stock market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 785-806, July.
    2. Magill, Michael & Quinzii, Martine, 2008. "Normative properties of stock market equilibrium with moral hazard," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 785-806, July.

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    More about this item

    Keywords

    hidden action; enforcement; constrained efficiency;
    All these keywords.

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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