An insurance company requires homeowners it insures to have smoke detectors in their homes. The insurance company is trying to combat the

Question

Quizplus · Accepted Answer

Requiring smoke detectors is a way to mitigate the moral hazard problem, which arises when one party to a contract can alter their behavior to the detriment of the other party after the contract has been concluded. In this case, having smoke detectors reduces the risk of fire damage, thus reducing the likelihood that homeowners will act recklessly knowing they have insurance coverage.

An Insurance Company Requires Homeowners It Insures to Have Smoke