Learn Before
Moral Hazard (Hidden Action Problem)
Origin of the Term 'Moral Hazard' in Insurance
The term 'moral hazard' first emerged in the insurance sector to articulate the issue where an insured party might take fewer precautions to prevent a loss, knowing they are protected. For example, a person with home insurance may not be as careful about fire prevention, thereby increasing the risk for the insurer compared to a situation without insurance.
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Social Science
Empirical Science
Science
CORE Econ
Economics
Economy
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Related
The Employer-Employee Relationship as a Principal-Agent Problem
Origin of the Term 'Moral Hazard' in Insurance
Role of External Uncertainty in Moral Hazard
Differentiating Negligence from Bad Luck in Insurance Claims
Incentive Alignment as a Partial Solution to Hidden-Action Problems
Moral Hazard in Labor Markets
Contractual Limits in Insurance to Mitigate Moral Hazard
Incompleteness of Insurance Contracts due to Hidden Actions
Market Failure as a Consequence of Hidden Actions
Agent's Decision on Care: Social vs. Private Benefit
Learn After
The term 'moral hazard' was first used within the insurance industry to describe a specific problem that arose from insuring clients. Which of the following scenarios best illustrates the original concern that this term was created to address?
The Insurer's Dilemma
The Merchant's Calculus
True or False: When the term 'moral hazard' was first introduced within the insurance industry, it specifically described the problem of clients intentionally destroying their own property to collect an insurance payment.
Match each description of a situation involving a contract with the scenario that best exemplifies it.
The Birthplace of a Concept: Moral Hazard in Early Insurance Markets
The term 'moral hazard' was first used in the insurance industry to describe a situation where an insured party, knowing they are financially protected, might take fewer ________ to prevent a loss, which in turn increases the risk for the insurer.
Arrange the following events in the logical order that illustrates the problem that led to the coining of the term 'moral hazard' within the early insurance industry.
Designing an 18th-Century Insurance Policy
A shipping company historically invested heavily in hiring the most experienced captains and reinforcing ship hulls to minimize the risk of losing cargo at sea. After purchasing a comprehensive insurance policy that covers the full value of any lost cargo, the company's management decides to cut costs by hiring less experienced captains and forgoing the expensive hull reinforcements. Which of the following best describes the specific behavioral change that the original term for this type of problem was created to identify?