Analyze the situations involving risk below to determine if they involve Moral H
ID: 1209364 • Letter: A
Question
Analyze the situations involving risk below to determine if they involve Moral Hazard (M), Adverse Selection (A), or the Principal-Agent Problem (P). For Moral Hazard write “M” in the blank. For Adverse Selection write “A” in the blank. For the Principal-Agent Problem write “P” in the blank. (1 pt. EACH; 5 pts. TOTAL)
____ a. Only the owners of sick pets purchase pet health insurance.
____ b. A mechanic tells you that you need new brakes, but you refuse to buy new brakes because you’re afraid she might be trying to rip you off.
____ c. In the season after signing a big contract, an athlete no longer gives his/her full effort, leading to a productivity drop from the previous year.
____ d. Bureaucrats have more information than politicians and may use that information to further their own interests.
____ e. Seeing that his passenger is a tourist, a taxicab driver takes a longer route to the destination in order to collect a higher fare.
Explanation / Answer
____A__a. Only the owners of sick pets purchase pet health insurance.
__M__ b. A mechanic tells you that you need new brakes, but you refuse to buy new brakes because you’re afraid she might be trying to rip you off.
_M___ c. In the season after signing a big contract, an athlete no longer gives his/her full effort, leading to a productivity drop from the previous year.
__P__ d. Bureaucrats have more information than politicians and may use that information to further their own interests.
_M___ e. Seeing that his passenger is a tourist, a taxicab driver takes a longer route to the destination in order to collect a higher fare.