When information is sold, there is often a reliability problem since anyone can claim to have superior knowledge. When risk aversion is unobservable, an information market is viable and cannot obtain the full value of his information because of the reliability problem. This provides an opportunity for intermediation since an intermediary may be able to capture some of the remaining value. We examine a general equilibrium model of asset prices in the presence of a simple informational imperfection.
Assets are productive only when combined with managerial service.
This limits the extent to which managers can shed risk by issuing claims. This paper addresses the First Theorem of Welfare Economics in a moral hazard environment. An entrepreneurial sells equity in a firm which he supplies with an unobservable, costly input. How much equity he retains determines his incentives and is observed by investors. The investors have rational expectations which cause the equity price to increase in the amount of equity the entrepreneur retains.