Robert M. Townsend

Optimal Contracts and Competitive Markets with Costly State Verification

This paper focuses on avoidable moral hazard and offers one explanation for limited insurance markets, for closely held firms, and for seemingly simple as opposed to contingent forms of debt. Agents have random endowments of a consumption good which are such that there are gains to trading contingent claims. But any realization of an endowment is known only by its owner unless a verification cost is borne. Contracts in such a setting are said to be consistent if agents submit to verification and honor claims in accordance with prior agreements. The Pareto optimal consistent contracts which emerge are shown to have familiar characteristics.

RISK AND INSURANCE IN VILLAGE INDIA

The full insurance model is tested using data from three poor, high-risk villages in the semi-arid tropics of southern India. The model presented here incorporates a number of salient features of the actual village economies. Although the model is rejected statistically, it does provide a surprisingly good benchmark. Household consumptions comove with village average consumption. More clearly, household consumptions are not much influenced by contemporaneous own income, sickness, unemployment, or other idiosyncratic shocks, controlling for village consumption (i.e., for village-level risk). There is evidence that the landless are less well insured than their village neighbors in one of the three villages. Copyright 1994 by The Econometric Society. (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.) (This abstract was borrowed from another version of this item.)

Pareto Optima and Competitive Equilibria with Adverse Selection and Moral Hazard

This paper explores the extent to which standard, general equilibrium analysis of Pareto optima and of competitive equilibria can be applied to environments with moral hazard and adverse selection problems. Allowing for lotteries, contracts with random components, we first establish that an adverse-selection insurance economy, a moral-hazard insurance economy, a signaling economy, and a private-information labor market economy are all special cases of a simple, general structure. We then show that techniques for characterizing Pareto optimal contracts as solutions to concave programming problems are useful and nice and appear to be broadly applicable; allowing for lotteries, we show how to characterize the optimal allocations for the adverse-selection insurance and labor market economies. We then show that standard existence and optimality theorems for competitive equilibria apply in the linear space containing lotteries if agents with characteristics which are distinct and privately observed at the time of initial trading enter the economy-wide resource constraints in a homogeneous way (other kinds of diversity are not critical). For economies with moral hazard which satisfy the homogeneity condition, competitive contract markets single out a subset of the optima and thus can be consistent with apparent unemployment and with a random allocation of labor supplied though all households are averse to risk. The adverse-selection insurance and signaling economies, however, do not satisfy the homogeneity condition and are difficult to decentralize efficiently with a price system.

Resource Allocation under Asymmetric Information

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Forecasting the Forecasts of Others

This paper explores the formulation and analysis of linear equilibrium models of investment in which learning is perpetual and informationally decentralized firms need never share the same beliefs concerning time series relevant to their decisions. Recursive, Kalman filtering techniques are shown to be applicable in an illustrative, hierarchical information structure, and a nonlinear technique of undetermined coefficients is shown to be applicable in an illustrative, symmetric information structure in which there is a confounding of laws of motion with forecasting problems. The equilibrium time series of these models can display interesting movement in response to shocks and measurement errors, including persistence, certain cross-correlation properties, and damped oscillations. That is, forecasts errors are serially correlated over decision makers and serially correlated over time in a certain crucial sense. More generally, these models do place restrictions on observed time series and can be fitted to data.

Patterns of Rainfall Insurance Participation in Rural India

Take-up of an innovative rainfall insurance policy offered to smallholder farmers in rural India decreases with basis risk between insurance payouts and income fluctuations, increases with household wealth, and decreases with binding credit constraints. These results are consistent with the predictions of a simple neoclassical model with borrowing constraints. Other patterns are less consistent with the benchmark model. For example, participation in village networks and measures of familiarity with the insurance vendor are strongly correlated with insurance take-up decisions, and risk-averse households are less, not more, likely to purchase insurance. These results may reflect household uncertainty about the product, given their limited experience with it.

Computing Multi-Period, Information-Constrained Optima

This paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi-period (including infinite-period), continuum-agent, unobservedeffort economy. Actual solutions are displayed illustrating cross-sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time. The optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full-information economy and various restricted-contracting regimes.

General Competitive Analysis in an Economy with Private Information

General Competitive Analysis in an Economy with Private Information Author(s): Edward C. Prescott and Robert M. Townsend Source: International Economic Review, Vol. 25, No. 1 (Feb., 1984), pp. 1-20 Published by: Blackwell Publishing for the Economics Department of the University of Pennsylvania and Institute of Social and Economic Research -Osaka University Stable URL: http://www.jstor.org/stable/2648863 Accessed: 25/06/2010 16:47

Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information

Informational asymmetries can play a key role in explaining the existence and nature of multiperiod contracts. In an illustrative risk-sharing model even relatively short (two-period) contracts can be mutually beneficial if there is private information, though one-period contracts suffice otherwise. Further, contracts which are Pareto optimal relative to the environment and the information structure are defined and partially characterized. An example illustrates how otherwise inefficient intertemporal tie-ins can be used optimally to mitigate incentive problems. The obvious borrowing-lending schemes are not private-information Pareto optimal; in these, period-by-period actions are not sufficiently constrained. Discounting affects the form of the optimal contract but none of these qualitative conclusions.

Entrepreneurship and financial constraints in Thailand

We use new data from rural and semi-urban Thailand to examine how financial constraints affect entrepreneurial activity. The analysis uses nonparametric and reduced form techniques. The results indicate that financial constraints play an important role in shaping the patterns of entrepreneurship in Thailand. In particular, wealthier households are more likely to start businesses. Wealthier households are also more likely to invest more in their businesses and face fewer constraints. We also provide evidence that financial constraints place greater restrictions on entrepreneurial activity in the poor Northeast compared to the more developed Central region.