Moral hazard: hidden actions - categories of asymetric information models
5 important questions on Moral hazard: hidden actions - categories of asymetric information models
Give exmamples of moral hazard with hidden actions and hidden knowledge
car insurance
medical insurance
Voluntary insurance: see Akerlof, Section III.A: “why doesn’t the price rise to match the risk?” Answer:
Insurance companies react by (extra) screening →see Akerlof, Section III.A:
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Give examples of adverse selection
2. Good workers might want to be known as good, depending on how they are paid.
3. A high-quality producer would like to be known as such, but low-quality producers also would like to acquire a reputation for high-quality.
The result is that a market in which there is asymmetric information with respect to quality shows characteristics similar to those described by Gresham's Law:
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