One way to reduce the problem of moral hazard is

Question

BlackTom AI · Accepted Answer

Moral hazard occurs when an individual’s behavior becomes riskier after obtaining insurance or protection because they no longer bear the full cost of that risk. Key concepts: principal–agent problem, hidden action (post-contract), incentive alignment, and contract design tools (deductibles, co-insurance, monitoring, experience-rating).

Step-by-step reasoning:
1. Full insurance removes the insured’s financial exposure to losses. If the insurer pays 100% of any loss, the insured’s marginal private cost of taking precautions falls to zero, so the insured has little or no incentive to avoid risky behavior.
2. Reducing coverage (i.e., not offering full insurance) reintroduces some financial exposure for the insured—through deductibles, co-payments, or limits—so the insured internalizes part of the cost of losses and thus has an incentive to reduce risk.
3. Numerical illustration: assume a potential loss L = $1,000, probability of loss without effort p1 = 0.10, probability with precaution p2 = 0.05, and cost of precaution c = $20. Under full insurance the insured pays $0 if loss occurs. The insured’s expected private benefit from exerting effort is zero, while cost is $20, so they do not take precautions. If there is a deductible d = $500 (i.e., not full insurance), the insured’s expected private savings from exerting effort = (p1 − p2) × d = 0.05 × $500 = $25, which exceeds the cost $20, so the insured will take precautions. This shows partial insurance reduces moral hazard.
4. Thus, not offering full insurance aligns incentives by making the insured responsible for part of losses and encouraging risk-reducing actions.

Why other options are incorrect:
- “Be corrupt.” Irrelevant and not a policy solution.
- “Use a screening mechanism.” Screening addresses adverse selection (hidden information about types before contracting), not moral hazard (hidden actions after contracting).
- “Use a signaling mechanism.” Signaling is also aimed at adverse selection; it does not directly solve the post-contract incentive problems that cause moral hazard.

Conclusion: Not offering full insurance (i.e., partial coverage via deductibles or co-insurance) is the correct method to reduce moral hazard, matching the provided answer.

One way to reduce the problem of moral hazard is单项选择题

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