Chapter 20 - Problem of Moral Hazard
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Moral hazard vs adverse selection
* Moral hazard - caused by hidden actions (insurance companies cannot observe your driving behavior) * Adverse selection - caused by hidden information (insurance companies cannot observe the inherent risks that you face)
Solutions to problem of moral hazard
*efforts to eliminate information asymmetry (by monitoring or by changing incentives of individuals)
Shirking
a type of moral hazard caused by the difficulty or cost of monitoring employees' behavior after a firm has hired them
Moral hazard
refers to the reduced incentive to exercise care once you purchase insurance