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In a fundamental contribution, Prescott and Townsend (1984) have shown that the existence and efficiency 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. 2 We briefly describe the moral hazard economy considered by Bennardo and Chiappori (2003). There is a continuum of ex ante identical individuals with measure one and a single consumption good. Individuals are aff ected both by an aggregate and an idiosyncratic endowment shock. Specifically, there are two aggregate states, s =1 ,2, and two idiosyncratic states, σ = a,b. The individual’s endowment y,s. Idiosyncratic shocks are independently and identically distributed across individuals, and independent of the aggregate shock. The probability of each aggregate state s is exogenous, and is denoted by λ and 1 − λ for s =1 and 2, respectively. On the other hand, the probability of

Comment on “Bertrand and Walras Equilibria under Moral Hazard”