What Determines Moral Hazard?: What Determines Moral Hazard?
The factors that determine moral hazard include how easy it is to detect whether the adverse event happened and how easy is it to change one’s behavior to establish the adverse event. Moral Hazard Is Multidimensional: Moral Hazard Is Multidimensional Moral hazard can arise along many dimensions. In examining the effects of social insurance, four types of moral hazard play a particularly important role: Reduced precaution against entering the adverse state. Increased odds of entering the adverse state. Increased expenditure when in the adverse state. Supplier responses to insurance against the adverse state. PUTTING IT ALL TOGETHER: OPTIMAL SOCIAL INSURANCE: PUTTING IT ALL TOGETHER: OPTIMAL SOCIAL INSURANCE There are four basic lessons: First, individuals value insurance and would ideally like to smooth consumption. Second, insurance markets may fail to emerge, primarily because of adverse selection. Third, private consumption smoothing mechanisms may be available; to the extent they ar
