REPEATED MORAL HAZARD AND ONE-SIDED COMMITMENT

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 properly 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. (C) 1995 Academic Press, Inc.