Which of the following is an example of moral hazard?
A) A buyer who makes a large raise in bid at an auction to discourage other bidders.
B) A doctor who performs a large number of in-office tests and is paid per test.
C) An elderly couple who elect a generous medical insurance policy.
D) A board of directors that is trying to refine the compensation system for its CEO.
E) A pitcher (about to sign with a new team) who is aware of a nagging elbow pain.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes more risks because they do not have to bear the full consequences of those risks. In option B, the doctor may perform unnecessary tests because they are paid per test, thus not bearing the cost of the additional tests.

Which of the Following Is an Example of Moral Hazard