Moral hazard and general equilibrium in large economies (Q5955109)

The paper analyzes a two period general equilibrium model with individual risk, aggregate uncertainty and normal hazard. There are finitely many types of households and a continuum of household of each type. Each households faces two individual states of nature in the second period. These states differ totally in the household's vector of initial resources which is strictly larger in the first state than in the second state. In the first period each household chooses a nonobservable action. Houshold's utilities are separable in action and the aggregate uncertainty is independent of the individual risk. Insurance is supplied by a collection of firms who maximize expected profits taking into account that each household's optimal choice of action is a function of the offered contract. The author provides conditions for the existence of an equilibrium and proves that any equilibrium is constrained Pareto optimal.