Pareto optima and competitive equilibria with moral hazard and financial markets

In this article, we consider a two-period pure exchange economy with idiosyncratic uncertainty, moral hazard and multiple consumption goods. We analyze two different market structures: contingent commodity markets and financial plus spot commodity markets. We propose a competitive equilibrium concept for each market structure and verify that it is possible to decentralize constrained efficient allocations as equilibria with contingent markets. Moreover, we characterize the conditions which prevent constrained efficient allocations from being decentralized as equilibria with financial markets.