This paper studies equilibria for economies characterized by moral hazard
(hidden action), in which the set of contracts marketed in equilibrium is
determined by the interaction of financial intermediaries.
The crucial aspect of the environment that we study is that
intermediaries are restricted to trade non-exclusive contracts: the
agents' contractual relationships with competing intermediaries cannot be
monitored (or are not contractible upon).
We fully characterize equilibrium allocations and ...
This paper studies equilibria for economies characterized by moral hazard
(hidden action), in which the set of contracts marketed in equilibrium is
determined by the interaction of financial intermediaries.
The crucial aspect of the environment that we study is that
intermediaries are restricted to trade non-exclusive contracts: the
agents' contractual relationships with competing intermediaries cannot be
monitored (or are not contractible upon).
We fully characterize equilibrium allocations and contracts. In this
set-up equilibrium allocations are clearly incentive constrained
inefficient. A robust property of equilibria with non-exclusivity is
that the contracts issued in equilibrium do not implement the optimal
action. Moreover we prove that, whenever equilibrium contracts do
implement the optimal action, intermediaries make positive profits and
equilibrium allocations are third best inefficient (where the definition
of third best efficiency accounts for constraints which capture the
non-exclusivity of contracts).
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