Asked by Mokaya Peter on Sep 24, 2024
Verified
An auto-insurance company introduces an anti-theft device that records how well the customer has secured his car.If the driver locks his car with the monitored lock every day,the rates go down.The company is trying to solve a __________problem
A) Adverse selection
B) Moral hazard
C) Forced bankruptcy
D) None of the above
Anti-Theft Device
A device or system designed to prevent unauthorized access to or theft of personal property or vehicles.
Auto-Insurance
A contract between a vehicle owner and an insurance company, where the insurer covers losses related to car accidents or theft.
Monitored Lock
A lock system that is tracked or observed to ensure its integrity, often used in security applications.
- Identify solutions to mitigate moral hazard in various contexts, such as insurance and employment.
- Analyze the implications of moral hazard in insurance settings.
Verified Answer
SS
Shaneet Sachdeva4 days ago
Final Answer :
B
Explanation :
The anti-theft device is an attempt to mitigate moral hazard, which is the risk that the insured will deliberately take actions that increase the likelihood of a loss (in this case, theft), knowing that the insurance company will bear the cost. By incentivizing the insured to take steps to secure their vehicle, the insurance company is hoping to reduce the likelihood of a theft occurring in the first place. Adverse selection refers to the problem of only high-risk individuals seeking insurance, while forced bankruptcy is not related to this scenario.
Learning Objectives
- Identify solutions to mitigate moral hazard in various contexts, such as insurance and employment.
- Analyze the implications of moral hazard in insurance settings.