People buy insurance to protect themselves from moral hazard." True or false? Explain.

Expert Solution

FALSE.

Moral hazard arises, with respect to insurance, when the insurance holders engage in riskier behavior and actions knowing that the damages caused by their risky behavior will be compensated by the insurance company. Therefore they feel more inclined to engage in riskier behavior after buying the insurance, which increases the moral hazard problem. Therefore purchasing insurance will increase moral hazard problem and not mitigate it.

Rahul Sunny answered 2 years ago

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Question

People buy insurance to protect themselves from moral hazard." True or false? Explain.

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Expert Solution

Related Solutions

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