Relation

Unobservable Effort and Insured Outcomes in Home Price Insurance

The moral hazard in home price insurance stems from an information asymmetry regarding the homeowner's effort. The homeowner's maintenance activities (the hidden action) are difficult for the insurer to monitor. The insurance contract is based on the final property value (the outcome), which is influenced by both the homeowner's effort and broader market forces. Because the insurance decouples the homeowner's financial outcome from their maintenance effort, it creates an incentive to reduce that effort.

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Updated 2025-08-21

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