Paper #345

Title:

Moral hazard and non-exclusive contracts

Authors:

Alberto Bisin and Danilo Guaitoli

Date:

June 1998

Abstract:

This paper studies equilibria for economies characterized by moral hazard (hidden action), in which the set of contracts marketed in equilibrium is determined by the interaction of financial intermediaries. The crucial aspect of the environment that we study is that intermediaries are restricted to trade non-exclusive contracts: the agents' contractual relationships with competing intermediaries cannot be monitored (or are not contractible upon). We fully characterize equilibrium allocations and contracts. In this set-up equilibrium allocations are clearly incentive constrained inefficient. A robust property of equilibria with non-exclusivity is that the contracts issued in equilibrium do not implement the optimal action. Moreover we prove that, whenever equilibrium contracts do implement the optimal action, intermediaries make positive profits and equilibrium allocations are third best inefficient (where the definition of third best efficiency accounts for constraints which capture the non-exclusivity of contracts).

Keywords:

Asymmetric information, exclusivity, efficiency

JEL codes:

D82, D61, G20

Area of Research:

Microeconomics

Published in:

Rand Journal of Economics, vol. 35, n. 2, pp. 306-328, Summer 2004

Download the paper in PDF format