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- Title
Futures market: contractual arrangement to restrain moral hazard in teams.
- Authors
Song, Joon
- Abstract
Holmstrom (Bell J Econ 13:324-340, ) argues that a principal is required to restrain moral hazard in a team: wasting output in certain states is required to enforce efficient effort, and the principal is a commitment device for the waste. Under competition in commodity and team-formation markets, I extend his model à la Prescott and Townsend (Econometrica 52(1):21-45, ) to show that competitive contracts can exploit the futures market to transfer output across states instead of wasting it. Thus, the futures market takes the place of a principal as a commitment device. Exploiting the duality of linear programming, I characterize the market environment and the contractual agreements for incentive-constrained efficiency.
- Subjects
FUTURES market; MORAL hazard; ECONOMIC efficiency; ECONOMIC competition; ECONOMIC models; LINEAR programming; CONTRACT theory
- Publication
Economic Theory, 2012, Vol 51, Issue 1, p163
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-010-0600-8