On the Long Run Implications of Repeated Moral Hazard

This paper analyzes the effects of moral hazard on long-run consumption 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 observable endowments. Next, it is shown that assuming a finite number of agents results in essentially the same outcomes as with a continuum of agents. Finally, it is shown that the key characteristic determining whether the utility of almost all agents becomes arbitrarily low is whether lim_c→∞U′(c) is bounded away from zero. Journal of Economic Literature Classification Numbers: D30; D31; D80; D82.