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Moral Hazard, Aggregate Risk and Nominal Linear Financial Contracts

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  • Alessandro, CITANNA
  • Archishman, CHAKRABORTY

Abstract

We study competitive equilibria with moral hazard in economies with aggregate risk and where trading occurs with an incomplete set of financial assets. The main conclusion of the paper is that, contrary to the individual risk economies, moral hazard is compatible with trading in competitive linear financial contracts, and gives rise to no manipulation problem. We establish existence of nonmanipulable equilibria provided that there are no relative price effects (e.g., a one-commoditiy economy), and that financial markets display nonlinearly homogeneous payoffs (e.g., nominal), and are sufficiently incomplete. Finally, we justify the linear contract as the optimal pricing schedule in a specific trading game with an auctioneer.

Suggested Citation

  • Alessandro, CITANNA & Archishman, CHAKRABORTY, 1999. "Moral Hazard, Aggregate Risk and Nominal Linear Financial Contracts," HEC Research Papers Series 683, HEC Paris.
    • Handle: RePEc:ebg:heccah:0683
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    More about this item

    Keywords

    moral hazard; linear contracts;

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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