Survey_BK_2013

Abstract

We establish our result, in a single-period economy, by a technique similar to that applied by Ábrahám, Koehne and Pavoni (2011) to a two-period moral-hazard economy where noncontingent savings are hidden, but insurance is assumed to be exclusive. We adapt to our purposes the structure of a standard hidden-action problem. Ex-ante identical, risk-averse individuals experience idiosyncratic income shocks that are observable and verifiable but occur with probabilities that depend on unobservable effort. Denoting the intensity of a hidden effort action with e and realized consumption with c, individual welfare is additively separable in the disutility v(e) and the expected value of utility u(c). In our simple moral hazard economy we have shown that a competitive equilibrium with incomplete non-exclusive or “hidden” insurance can exist, and that it is not efficient when consumption levels are influenced by equilibrium effort and prices through channels that individual choices fail to internalize.