We present a general equilibrium model of a moral-hazard economy with many firms and financial markets, where stocks and bonds are traded. Contrary to the principal-agent literature, we argue that optimal contracting in an infinite economy is not about a tradeoff between risk sharing and incentives, but it is all about incentives. Even when the economy is finite, optimal contracts do not depend on principals' risk aversion, but on market prices of risks. We also show that optimal contracting does not require relative performance evaluation, that the first best riskfree interest rate is lower than that of the first best, and that the second-best equity premium can be either higher or lower than that of the first best. Based on these results, we argue that given the volatility of the market portfolio, moral hazard can contribute to the resolution of the riskfree rate puzzle, but unlike the literature suggests, moral hazard can neither help explain nor deepen the equity premium puzzle.
Keywords: moral hazard, general equilibrium, optimal contract, relative performance, evaluation, equity premium, interest rate.
학회소식
학회소식