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

A company hires a remote salesperson on a fixed monthly salary to generate new leads. The number of successful leads generated depends on both the salesperson's effort in making calls and researching clients, as well as external factors like the overall economic climate and competitor actions. The company cannot directly monitor the salesperson's day-to-day activities. Why does this arrangement present a hidden action problem?

Insurance and Risky Behavior

Government Bailouts and Future Risk

A health insurance company notices that individuals who are more likely to need extensive medical care are the ones most eager to purchase its comprehensive insurance policies. This situation is a classic example of a hidden action problem.

Analyzing Performance Under Uncertainty

Match each scenario with the description that best explains whether it represents a hidden action problem.

Evaluating Solutions to Moral Hazard in Unemployment Benefits

In a hidden action problem, the presence of ______ makes it difficult for one party to determine whether a negative outcome was caused by the other party's unobservable behavior or by factors beyond anyone's control.

A driver purchases a full-coverage auto insurance policy. Arrange the following events to illustrate the logical progression of a hidden action problem from the insurer's perspective.

Evaluating CEO Compensation Structures

Moral Hazard as a Challenge for Home Price Insurance

Designing an Employment Contract to Mitigate Hidden Actions

A company hires a remote salesperson and offers them a fixed monthly salary, with no performance-based commissions. The company cannot easily monitor the salesperson's day-to-day effort. Which of the following outcomes is the most direct consequence of this information arrangement?

When an insurance company offers a policy, it cannot know for certain whether a policyholder will engage in risky behaviors after purchasing the coverage. This situation, where one party's actions post-agreement are unobservable to the other, is an example of a __________ problem.

Origin of the Term 'Moral Hazard' in Insurance

Divergence of Social and Private Benefit in Principal-Agent Problems

The Inefficiency of Insured Behavior

Inefficiency in the Rental Market

A company owner pays a manager a fixed salary to run a new project. The project's success depends on both the manager's effort and random market factors. The owner cannot directly observe the manager's level of effort. The manager, knowing this, chooses to exert low effort because high effort is personally costly and does not increase their fixed salary. This leads to a lower probability of the project's success. Why is this outcome considered Pareto inefficient?

Insured Driver's Risky Behavior

Role of External Uncertainty in Hidden-Action Problems

Origin of the Term 'Moral Hazard' in Insurance

Moral Hazard as a Cause of Pareto Inefficiency

The Employer-Employee Relationship as a Principal-Agent Problem

The Lender-Borrower Relationship as a Principal-Agent Problem

A company offers its sales employees a guaranteed annual salary with no commission, regardless of their individual sales performance. The company cannot directly observe the amount of effort each employee puts into finding new clients. A few months after this compensation plan is implemented, the management notices a significant drop in overall sales. Which economic problem best explains this outcome?

Loan Program Outcome Analysis

Incentive Structure in Rental Agreements

Analyze the following scenarios. Match each scenario with the description that best explains its relationship to the problem of one party taking unobservable actions that affect another party after an agreement is made.

An insurance company raises its premiums because it finds that individuals who are already in poor health are the most likely to purchase its policies. This situation is a classic example of the 'hidden actions' problem.

Analyzing the Employer-Employee Relationship

After a city government guarantees it will cover all financial losses for any new restaurant that fails within its first year, several new restaurant owners begin to take significant, unobservable risks with their business models, such as using overly expensive, low-demand ingredients. This change in behavior, driven by the financial safety net, is a classic example of a(n) ____ problem.

A person buys a comprehensive insurance policy for their new car. Arrange the following events in the logical order that demonstrates the development of a 'hidden actions' problem.

Evaluating Solutions to Unobservable Behavior in Insurance

Analyzing Remote Work Incentives