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A Note on Walrasian Equilibria with Moral Hazard and Aggregate Uncertainty

In a fundamental contribution, Prescott and Townsend (1984) [PT] have shown that the existence and efficiency properties of Walrasian equilibria extend to economies with moral hazard, when agents' trades are observable (exclusive contracts can be implemented). More recently, Bennardo and Chiappori (2003) [BC] have argued that Walrasian equilibria may (robustly) fail to exist when the class of moral hazard economies considered by Prescott and Townsend is generalized to allow for the presence of aggregate, in addition to idiosyncratic, uncertainty and for preferences which are nonseparable in consumption and effort. We re-examine here the existence and efficiency properties of Walrasian equilibria in the moral hazard economy considered by Bennardo and Chiappori. We show that Walrasian equilibria always exist in such economy and are incentive efficient, so the results of Prescott and Townsend continue to hold in the more general set-up considered by Bennardo and Chiappori.