Center for Economic Research, Department of Economics, University of Minnesota
This paper explores the extent to which standard, general equilibrium
analysis of optima and competitive equilibria in the linear space containing
lotteries can be applied to environments with moral· hazard and adverse
selection problems. Techniques for characterizing optima as solutions to
linear programs are found to be useful and nice and appear to be broadly
applicable. But existence and optimality of competitive equilibria seem to
require that agents with characteristics which are distinct and privately
observed at the time -of initial trading enter the economy-wide resource
constraints in a homogeneous way; subsequent heterogeneity is not critical.
The homogeneity condition is satisfied for a dynamic private-information
securities economy and a moral hazard insurance economy, but not for the
well-known and interesting signaling and adverse-selection insurance
economies. For the latter, heterogeneity introduces an externality of some
Prescott, E.C. and Townsend, R.M., (1981), "Optima and Competitive Equilibria with Adverse Selection and Moral Hazard", Discussion Paper No. 152, Center for Economic Research, Department of Economics, University of Minnesota.
Prescott, Edward C.; Townsend, Robert M..
Optima and Competitive Equilibria with Adverse Selection and Moral Hazard.
Center for Economic Research, Department of Economics, University of Minnesota.
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