Insuring Homeowners Against Home Price Fluctuations

Moral Hazard as a Challenge for Home Price Insurance

A company hires a salesperson on a fixed salary, regardless of the number of sales they make. The salesperson's daily effort level, which directly influences sales but is difficult for the manager to monitor, subsequently declines. Which element of this scenario best illustrates the 'hidden action' that characterizes a moral hazard problem?

Information Asymmetry in Auto Repair

Analyzing an Insurance Scenario

Moral hazard arises primarily because one party in a transaction has more or better information about their own inherent risk level than the other party before the transaction occurs.

A car owner purchases a comprehensive insurance policy that covers all repair costs from accidents. Because the owner knows they are fully protected from the financial cost of repairs, they begin to drive more recklessly, an action the insurance company cannot directly observe. Analyze this scenario by matching each element to its correct role in the described problem.

Deconstructing the Principal-Agent Problem of Unobservable Actions

Moral hazard is often referred to as the 'hidden ______' problem because it arises when one party in an agreement cannot observe the post-contractual behavior of the other party.

Arrange the following events to illustrate the typical progression of a moral hazard problem, from its initial conditions to its outcome.