ON THE LONG-RUN IMPLICATIONS OF REPEATED MORAL HAZARD

This paper analyzes the effects of moral hazard on long-run consumptio n or utility. Given exponential utility, it is shown that the utility of those with unobservable endowments becomes arbitrarily negative as long as any positive fraction of otherwise identical agents have obser vable endowments. Next, it is shown that assuming a finite number of a gents results in essentially the same outcomes as with a continuum of agents. Finally, it is shown that the key characteristic determining w hether the utility of almost all agents becomes arbitrarily low is whe ther lim(c-->infinity) U'(c) is bounded away from zero. (C) 1998 Acade mic Press.