Bill purchases property insurance for his office building, which includes coverage for fire damage. The policy offers premium discounts for smoke detectors, fire alarms, fire extinguishers and sprinkler systems. This is an incentive system to help avoid
A) adverse selection.
B) moral hazard.
C) optimal-stopping.
D) none of the above.

Question

Quizplus · Accepted Answer

The premium discounts are an incentive to install safety devices that reduce the risk of fire damage. This helps to avoid moral hazard, which is the situation where one party to a transaction has an incentive to take actions that are detrimental to the other party.

Bill Purchases Property Insurance for His Office Building, Which Includes