The Welfare Economics of Moral Hazard

Richard Arnott, Joseph Stiglitz

NBER Working Paper No. 3316 (Also Reprint No. r1552)
Issued in April 1991
NBER Program(s):   PE

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.

(376 K)

Published: Risk, Information and Insurance, edited by Henri Louberge, pp. 91-121. Norwell, MA: Kluwer Academic Publishers 1990.

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