Incentive Compatibility and Pricing under Moral Hazard
We show how to recover equilibrium prices supporting incentive efficient allocations in a classic insurance economy with moral hazard. Our key modeling choice is to impose the incentive compatibility constraints on insurance firms, and not on consumers as in Prescott and Townsend (1984). We show that equilibrium prices of insurance contracts are equal to the sum of the shadow costs arising from the resource and incentive compatibility constraints in the planner's problem. The equilibrium allocations are the same as when the incentive compatibility constraints are imposed on consumers. As in Prescott and Townsend, the two welfare theorems hold. (Copyright: Elsevier)
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.