Bertrand and Walras Equilibria Under Moral Hazard

Posted: 23 Aug 2003

See all articles by Alberto Bennardo

Alberto Bennardo

University of Salerno - Centre for Studies in Economics and Finance (CSEF); University of California, Los Angeles (UCLA) - Department of Economics; Centre for Economic Policy Research (CEPR)

Pierre-Andre Chiappori

Columbia University - Graduate School of Arts and Sciences, Department of Economics

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Abstract

We consider a simple model of competition under moral hazard with constant return technologies. We consider preferences that are not separable in effort: Marginal utility of leisure is assumed to increase with income, especially for high income levels. We show that, in this context, Bertrand competition may result in positive equilibrium profit. This result holds for purely idiosyncratic shocks when only deterministic contracts are considered and extends to unrestricted contract spaces in the presence of aggregate uncertainty. Finally, these findings have important consequences on the definition of an equilibrium. We show that, in this context, a Walrasian general equilibrium a la Prescott-Townsend may fail to exist: any "equilibrium" must involve rationing.

Suggested Citation

Bennardo, Alberto and Chiappori, Pierre-Andre, Bertrand and Walras Equilibria Under Moral Hazard. Available at SSRN: https://ssrn.com/abstract=421503

Alberto Bennardo

University of Salerno - Centre for Studies in Economics and Finance (CSEF) ( email )

84084 Fisciano, Salerno
Italy

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Pierre-Andre Chiappori (Contact Author)

Columbia University - Graduate School of Arts and Sciences, Department of Economics ( email )

420 W. 118th Street
New York, NY 10027
United States

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