Market failure with moral hazard and side trading

Charles M. Kahn, Dilip Mookherjee

Research output: Contribution to journalArticlepeer-review


This paper compares full-information insurance markets (a) with markets where accident-reducing effort levels are unverifiable but trades between every pair of agents are verifiable and (b) with markets where neither effort nor trades are verifiable. Markets are represented by a contracting game, with a solution concept allowing coordination among coalitions through information-constrained contracts. Each informational setting yields a correspondence between market outcomes and the appropriate notion of constrained efficiency in a social planner's problem. Although incentive externalities do not cause market outcomes to be constrained inefficient, they do imply a welfare gain from public verifiability of trades.

Original languageEnglish (US)
Pages (from-to)159-184
Number of pages26
JournalJournal of Public Economics
Issue number2
StatePublished - Oct 1995


  • Coalitions
  • Moral hazard
  • Side trading

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics


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