Kilenthong, Weerachart and Townsend, Robert (2010): Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution.
Download (561kB) | Preview
This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price islands, created endogenously in equilibrium.
|Item Type:||MPRA Paper|
|Original Title:||Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution|
|English Title:||Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution|
|Keywords:||Externalities; Private information; Moral hazard; Retrading; Walrasian equilibrium; Constrained efficiency; Decentralization|
|Subjects:||D - Microeconomics > D6 - Welfare Economics > D62 - Externalities
D - Microeconomics > D6 - Welfare Economics > D61 - Allocative Efficiency ; Cost-Benefit Analysis
D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D51 - Exchange and Production Economies
|Depositing User:||Weerachart Kilenthong|
|Date Deposited:||14. Apr 2010 23:09|
|Last Modified:||17. Mar 2015 02:54|
Acemoglu, D. and A. Simsek (2008): Moral Hazard and Eciency in General Equilibrium with Anonymous Trading," Working Paper.
Caballero, R. and A. Krishnamurthy (2001): International and domestic collateral constraints in a model of emerging market crises," Journal of Monetary Economics, 48, 513-548.
Caballero, R. and A. Krishnamurthy (2004): Smoothing Sudden Stops," Journal of Economic Theory, 119, 104-127.
Debreu, G. (1954): Valuation Equilibrium and Pareto Optimum," Proceedings of the National Academy of Sciences of the United States of America, 40, 588.
Diamond, D. and P. Dybvig (1983): Bank Runs, Deposit Insurance, and Liquidity," The Journal of Political Economy, 91, 401.
Geanakoplos, J. and H. Polemarchakis (1986): Existence, regularity and constrained suboptimality of competitive allocations when the asset market is incomplete," Uncertainty, Information and Communication: Essays in Honor of KJ Arrow, 3, 65-96.
Golosov, M. and A. Tsyvinski (2007): Optimal Taxation With Endogenous Insurance Markets," The Quarterly Journal of Economics, 122, 487-534.
Greenwald, B. and J. Stiglitz (1986): Externalities in Economies with Imperfect Information and Incomplete Markets," Quarterly Journal of Economics, 101, 229-264.
Jacklin, C. (1987): Demand Deposits, Trading Restrictions, and Risk Sharing," Contractual Arrangements for Intertemporal Trade, 26-47.
Kilenthong, T. and R. M. Townsend (2009): Market Based, Segregated Exchanges in Securities with Default Risk," UCSB Working Paper.
Lorenzoni, G. (2008): Inefficient Credit Booms," Review of Economic Studies, 75, 809-833.
Negishi, T. (1960): Welfare Economics and Existence of an Equilibrium for a Competitive Economy," Metroeconomica, 12, 92-97.
Prescott, E. C. and R. M. Townsend (1984a): General Competitive Analysis in an Economy with Private Information," International Economic Review, 25, 1-20.
Prescott, E. C. and R. M. Townsend (1984b): Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard," Econometrica, 52, 21-45.
Prescott, E. S. and R. M. Townsend (2006): Firms as Clubs in Walrasian Markets with Private Information," Journal of Political Economy, 114, 644-671.