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Title: Informationconstrained optima with retrading: An externality and its marketbased solution
Authors: Kilenthong, W.T. 
Townsend, R.M. 
Keywords: Constrained efficiency;Decentralization;Externalities;Moral hazard;Private information;Retrading;Walrasian equilibrium
Issue Date: 2011
Publisher: Scopus
University of the Thai Chamber of Commerce
Source: W.T. Kilenthong, R.M. Townsend (2011) Informationconstrained optima with retrading: An externality and its marketbased solution. Journal of Economic Theory Vol.146 No.3, 1042-1077.
Abstract: 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 priceislands, created endogenously in equilibrium.
Rights: This work is protected by copyright. Reproduction or distribution of the work in any format is prohibited without written permission of the copyright owner.
Appears in Collections:RSO: Journal Articles

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