For each of the following kinds of insurance, explain briefly what sort of behav

Question

For each of the following kinds of insurance, explain briefly what sort of behavior might be encouraged by moral hazard: insurance against a home being damaged by flooding: insurance against having the paint on your car badly scratched; insurance against being fired from one's job; insurance for a business against the risk of suffering lasses rather than earning profits. Explain how adverse selection might discourage companies from even offering to sell the following kinds of insurance: insurance against a home being damaged by flooding: insurance against being fired from one's job; insurance for a business against the risk of suffering lasses rather than earning profits.

Explanation / Answer

Moral hazard and insurance:

Adverse selection:

Insurance against a home being damaged by flooding: Since firm does not have full information about the behavior of customers, thus firm is discouraged.

Insurance against being fired from one, job: worker intentions and informations are not fully covered

insurance for a business against the risk of suffering losses rather than earning profits: Here adverse selection is less likely to appear since firm are aim for profit maximization.

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