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Journal of Political Economy Vol. 111 No. 4 2003

Bertrand and Walras Equilibria under Moral Hazard

Alberto Bennardo1,2,3,4; Pierre-André Chiappori5,6

1 University of Salerno · 2 University of California, Los Angeles · 3 Centre for Economic Policy Research · 4 Centre for Studies in Economics and Finance · 5 University of Chicago · 6 Columbia University

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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 income is assumed to increase with leisure, 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 à la Prescott‐Townsend may fail to exist: any “equilibrium” must involve rationing.

DOI
10.1086/375384
Volume
111
Issue
4
Pages
785-817
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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