Comment on ‘Bertrand and Walras Equilibria under Moral Hazard'

In a fundamental contribution, Prescott and Townsend (1984) have shown that the existence and e fficiency properties of Walrasian equilibria extend to economies with moral hazard and exclusive contracts. Recently, Bennardo and Chiappori (2003) have argued that Walrasian equilibria may (robustly) fail to exist when the class of moral hazard economies in Prescott-Townsend is generalized to allow for aggregate, in addition to idiosyncratic, uncertainty, if preferences are nonseparable in consumption and effort. This note shows that such claim is incorrect and that the existence and efficiency properties of Walrasian equilibria remain valid in the set-up considered by Bennardo and Chiappori.