Question

Which of the following is NOT an example of moral hazard?

 a. a person buys insurance only after finding out that he or she is at high risk.

 b. a person is less careful about driving after purchasing collision insurance.

 c. an unemployed worker stays unemployed an extra week, collecting more unemployment insurance, even though a job is available.

 d. a person only goes to the doctor after finding out that the visit will be covered by insurance. 

Answer 1

Since moral hazard problem arises when there is asymmetric information between two parties and there is a change in the behavior of one party after a deal has happened.

So when a person buys insurance only after finding out that he or she is at high risk, then this person knows about the risk. So for taking advantage of insurance, he does not disclose this to company. Hence it is an example of moral hazard.

When a person is less careful about driving after purchasing collision insurance, he is doing so because he knew if anything happens, he will receive insurance money. Hence it is an example of moral hazard because he is cheating with company.

When an unemployed worker stays unemployed an extra week, collecting more unemployment insurance, even though a job is available. So this man willingly not working because he is getting unemployment benefit. So he is also cheating to insurance company. Hence it is an example of moral hazard.

When a person only goes to the doctor after finding out that the visit will be covered by insurance, then this man is not cheating to the company but he does not want to spend money from his pocket. Hence this is not an example of moral hazard because he is not cheating to the insurance company but saving his money.

Hence option d is the correct answer.