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Repeated Moral Hazard and One-Sided Commitment

Authors
Journal
Journal of Economic Theory
0022-0531
Publisher
Elsevier
Publication Date
Volume
66
Issue
2
Identifiers
DOI: 10.1006/jeth.1995.1050

Abstract

Abstract This paper considers a repeated unobserved endowment economy with a restriction that agents can walk away from insurance contracts at the beginning of any period and contract with another insurer (one-sided commitment). An equilibrium is derived characterized by a unique, market-determined insurance contract with the property that agents never want to walk away from it. The paper shows that trade (or insurance) still occurs and that a non-degenerate long-run distribution of consumption exists. A numerical example shows that this distribution is nearly log-normal. Journal of Economic Literature Classification Numbers: D30, D31, D80, D82.

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