Repeated insurance relationships in a costly state verification model: With an application to deposit insurance

We consider the problem of an insurer who enters into a repeated relationship with a set of risk averse agents in the presence of ex post verification costs, The insurer wishes to minimize the expected cost of providing these agents a certain expected utility level. We characterize the optimal contract between the insurer and the insured, agents. We then apply the analysis to the provision of deposit insurance. Our results suggest - in a deposit insurance context - that it may be optima. to utilize the discount window early on, and to make deposit insurance payments only later, or not at all. (C) 1998 Elsevier Science B.V. All rights reserved.