It is now well understood that in economies with asymmetric information, a contract between a principal and an agent typically generates informational externalities. The goal of this research is to understand the interaction between two important restrictions on economic agents' abilities to reach efficient outcomes: incentive problems resulting from imperfect information and the difficulties of coordinating the actions of groups of individuals. An example of such an environment is one in which agents are subject to moral hazard and trades cannot be publically monitored. Criteria will be developed for describing constrained efficiency in such environments and for use in analyzing models of market games played by agents subject to this combination of restrictions. Cooperative and non-cooperative solution concepts will be developed to investigate the sense in which the outcomes of such games are or are not constrained efficient. The extent to which the outcomes in such economies can be characterized in terms of competitive equilibria or Lindahl equilibria of Arrow-Debreu economies for a suitably augmented commodity space also will be studied. The results will be used to reinterpret the role played by government in improving the allocations in economies subject to these restrictions and how the government's role varies, depending upon its monitoring powers. The issues of asymmetric information addressed in this research are fundamental but potentially also they have great practical importance. The proposed modelling of the advantages the government has in monitoring vis-a-vis private agents can reshape the advice given to policy makers concerning appropriate government intervention in the presence of informational asymmetries.
