In this paper we study the constrained efficiency of a stock market equilibrium under moral hazard.We extend a standard general equilbrium framework (Magill and Quinzii (1999) and (2002)) to allow for a more general initial ownership distribution.We show that the market allocation is constrained efficient only if in each firm the entrepreneur who generates payoffs through unobservable effort has full initial property rights to his firm.This result holds even if the market can anticipate correctly the optimal effort choice of each entrepreneur from their observable financing decisions.
|Place of Publication||Tilburg|
|Number of pages||10|
|Publication status||Published - 2003|
|Name||CentER Discussion Paper|
- stock markets
- moral hazard
- general equilibrium