Journal of Economic Theory and Econometrics: Journal of the Korean Econometric Society
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Journal of Economic Theory and Econometrics
JETEM/계량경제학보/計量經濟學報/JKES
Journal of the Korean Econometric Society

Contractual Matching of Finite Economy: Limits of Decentralization

Vol.22, No.2, June , 92–121



  •   (Sungkyunkwan University)

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Abstract  

This paper considers incentive-constrained efficient contractual matching of individuals in the presence of moral hazard. By considering an economy with finite number of individuals, this paper shows what were assumed away in continuum models. Contract arbitrageurs specializing in writing (randomized) contracts, insurers, a market for lotteries on contracts, Lindahl-like prices for the lotteries, and a public randomization device are required for the incentive-constrained efficiency. The public randomization device needs to coordinate the matchings of individuals, and each team's contract is dependent on other firms' outputs. Insurers are committed to avoid cream-skimming, and essentially cross-subsidize across teams. This unrealistic role of the insurers shows the impossibility of decentralization in a reasonable sense (even when economics agents are price takers). Applications in Labor economics and Theory of merger are discussed. Technical contribution is to formulate a finite economy by linear programming.


Keywords
   General equilibrium, Team, Finite economy, Duality of linear programming

JEL classification codes
   C68, D50, D53, D86
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