The Efficient Allocation of Consumption under Moral Hazard and Hidden Access to the Credit Market

In this paper, we describe the properties of the optimal allocation of consumption in a world with moral hazard and hidden borrowing and lending. We discuss how and under what conditions the efficient allocation can be distinguished from that of the permanent income (self-insurance) model. We also compare our allocation with the complete markets (full information) case, and with the standard moral hazard model with monitorable and fully contractible asset holdings. (JEL: D82, E21) Copyright (c) 2005 The European Economic Association.