Optima and Competitive Equilibria with Adverse Selection and Moral Hazard

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Optima and Competitive Equilibria with Adverse Selection and Moral Hazard

Authors

Prescott, Edward C.

Townsend, Robert M.

Published Date

1981-06

Publisher

Center for Economic Research, Department of Economics, University of Minnesota

Type

Working Paper

Abstract

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 kind.

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Center for Economic Research Discussion Papers

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Discussion Paper
152

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Previously Published Citation

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.

Suggested citation

Prescott, Edward C.; Townsend, Robert M.. (1981). Optima and Competitive Equilibria with Adverse Selection and Moral Hazard. Retrieved from the University Digital Conservancy, https://hdl.handle.net/11299/55127.

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