Futures market: contractual arrangement to restrain moral hazard in teams |
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Authors: | Joon Song |
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Institution: | 1. Department of Economics, University of Essex, Colchester, Essex, UK 2. Department of Economics, Sungkyunkwan University, Seoul, Korea
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Abstract: | Holmstrom (Bell J Econ 13:324?C340, 1982) 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?C45, 1984) 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. |
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