The Welfare Economics of Moral Hazard
NBER Working Paper No. 3316 (Also Reprint No. r1552)
This paper shows that, except in certain limiting cases, competitive equilibrium with moral hazard is constrained inefficient. The first section compares the competitive equilibrium and the constrained social optimum in a fairly general model, and identifies types of market failure. Each of the subsequent sections focuses on a particular market failure.
Published: Risk, Information and Insurance, edited by Henri Louberge, pp. 91-121. Norwell, MA: Kluwer Academic Publishers 1990.