Log in
Economics
1
answer
0
watching
316
views

Describe a moral hazard problem your company is facing. What is the source of the asymmetric information? Who is the less informed party? Are there any wealth-creating transactions not consummated as a result of the asymmetric information? If so, could you consummate them? Compute the profit consequences of any advice.

Watch
1
answer
0
watching
316
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Chika Ilonah
Chika IlonahLv10
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

Long term disability (LTD) insurance policies cover workers who become disabled and can no longer perform their job functions. Workers who think they qualify as disabled can submit a claim to their employer for LTD payments to replace their lost wages.

Below is an excerpt of the abstract of a recent NBER working paper entitled a Moral Hazard and Claims Deterrence in Private Disability Insurance by David Autor, Mark Duggan, and Jonathan Gruber:

We provide a detailed analysis of the incidence, duration and determinants of claims made on private Long Term Disability (LTD) policies using a database of approximately 10,000 policies and 1 million workers from a major LTD insurer.. . . we find that a higher [wage] replacement rate and a shorter waiting time to benefits receipt . . . significantly increase the likelihood that workers claim LTD.

(a) Higher disability claim rates when LTD benefits are more favourable may be an instance of moral hazard. Any instance of moral hazard involves a price distortion, a behaviour response, and an information asymmetry. What is the price distortion in this example?

(b) What is the purported behaviour response?

(c) What is the nature of the information asymmetry? Explain what would happen if this information asymmetry did not exist.

(d) If the higher wage replacement rate and shorter waiting time policies had been applied randomly to different workers in this sample, then the finding would be convincing evidence of moral hazard. Explain how the same result could have been found even if there was no moral hazard (that is, no behaviour response to the price distortion)?

Question 18

  1. Externalities occur when there is a lack of

    free-riding.

    well-defined property rights.

    market participants.

    government regulation.

3 points

Question 19

  1. When people buy insurance they often adopt risky behavior. This is an example of

    adverse selection.

    moral hazard.

    a negative externality.

    moral hazard and a negative externality.

3 points

Question 20

  1. All the costs of a transaction are referred to as

    transfer costs.

    transactions costs.

    marketing expenditures.

    accounting costs.

3 points

Question 21

  1. Firms would not exist if

    contracts were incomplete.

    residual income equaled normal profit.

    income was spontaneously earned.

    contracts were complete.

3 points

Question 22

  1. The Prime Directive says look to

    the market.

    the government.

    competitors.

    all of these choices.

3 points

Question 23

  1. A firm can find a competitive advantage

    by differentiating its product.

    by having a barrier to entry.

    through its organizational structure.

    all of these choices.

3 points

Question 24

  1. An organizational form that is structured around basic business functions is called

    M-form.

    U-form.

    a matrix.

    a network.

3 points

Question 25

  1. The set of collectively held beliefs, values, and norms among the members of a firm that influence individual behavior is referred to as

    network values.

    horizontal values.

    implicit contracts.

    corporate culture.

3 points

Question 26

  1. "People who have dental insurance don't floss often enough." This is an example of

    asymmetric information.

    bad parenting.

    moral hazard.

    risk adverse behavior

3 points

Question 27

  1. A common way used to align the interests of managers with the interests of equity holders is

    piecework pay.

    stock options.

    forwarded loaded pay schemes.

    insurance.

3 points

Question 28

  1. A piecework wage compensation may be used if productivity

    can be related to the supply chain.

    is easy to measure.

    is difficult to observe.

    is backloaded.

Suppose there are two types of people who need health insurance; high-risk and low-risk consumers. High-risk consumers have a relatively high probability of needing expensive medical care and on average incur $2,000 of medical expenses per year. The high-risk consumers would be willing to pay up to $2,500 for insurance that covers all their medical bills. Low-risk consumers would be willing to pay up to $1,400 for full-coverage insurance and on average would incur on average $1,200 in medical bills. Assume 1/3 of all consumers are high-risk and the remaining 2/3 of consumers are low-risk. Consumers know whether they are high-risk or low-risk. The insurance company knows 2/3 of all consumers are low-risk but cannot identify which consumers are low-risk.

If all consumers bought insurance, what price must the insurance company charge to break even in expectation? That is, what price must the insurance company charge so that the expected payments equals the premium?

Which consumers would purchase insurance at that price?

Are there wealth-creating transactions that are not consummated because of the information asymmetry?

If the low-risk consumers were willing to pay $1,500 for the insurance, how would your answers to questions 2 and 3 change?

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in