An auto-insurance company introduces an anti-theft device that records how well the customer has secured his car.If the driver locks his car with the monitored lock every day,the rates go down.The company is trying to solve a __________problem
A)Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)None of the above

Question

An auto-insurance company introduces an anti-theft device that records how well the customer has secured his car.If the driver locks his car with the monitored lock every day,the rates go down.The company is trying to solve a __________problem
A)​Adverse selection
B)Moral hazard
C)Forced bankruptcy
D)​None of the above

Quizplus · Accepted Answer

The anti-theft device is an attempt to mitigate moral hazard, which is the risk that the insured will deliberately take actions that increase the likelihood of a loss (in this case, theft), knowing that the insurance company will bear the cost. By incentivizing the insured to take steps to secure their vehicle, the insurance company is hoping to reduce the likelihood of a theft occurring in the first place. Adverse selection refers to the problem of only high-risk individuals seeking insurance, while forced bankruptcy is not related to this scenario.

An Auto-Insurance Company Introduces an Anti-Theft Device That Records How