Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 15, Problem 3E
To determine
To ascertain:The specific consequences of loan terms that worsen the problem of moral hazard.
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Consider the following abstract from the following research paper “Do Social Connections Reduce Moral Hazard? Evidence from the New York City Taxi Industry” by C. Kirabo Jackson and Henry Schneider:
“This study investigates the role of social networks in aligning the incentives of agents in settings with incomplete contracts. Specifically, the study examines the New York City taxi industry where taxis are often leased and lessee-drivers have worse driving outcomes [like gas overuse and accidents] than owner-drivers due to moral hazard… We find that drivers leasing from members of their country-of-birth community exhibit significantly reduced effects of moral hazard, representing an improvement… of the outcome measures.”
1. Thinking of moral hazard, draw an analogy between the taxi leasing industry and health insurance. Specifically, briefly highlight the following aspects
Price distortion effects
Behaviour change due to price sensitivity
Information asymmetry
Social loss
2. The paper…
Explain the relationship between moral hazard and insurance premiums
Explain how moral Hazard can lead to market failure.
Chapter 15 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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- Considering the mitigation of damages rule, the formula for damages is the amount generally recoverable as damages less the amount of loss the injured party could reasonably have avoided by stopping performance, making substitute arrangements, or otherwise. True Falsearrow_forwardGive an example, real or imaginary, of an adverse selection problem. Your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficientarrow_forwardwhich of the strategies is effective in reducing moral hazard? gatekeeping cost sharing prospective payment all of the abovearrow_forward
- Give an example, real or imaginary, of a moral hazard problem. Again, your example must clearly point out: what information is private/asymmetric (is it an attribute or an action?) which party has the private information when does the information asymmetry arise (before or after the contract/transaction?) what is the likely outcome and in which way it can be inefficientarrow_forwardThe moral hazard in team production arises from ........arrow_forwardWhich of the following statements is correct? a. In a principal-agent model, the party who proposes the contract is called the principal. b. In a principal-agent model, the party who decides whether or not to accept the contract and then performs under the terms of the contract (if accepted) is called the agent. c. In a principal-agent model, the agent is usually the party with asymmetric (or better) information. d. All of the above.arrow_forward
- Which of the following is FALSE related to the Bank Run game ? A. Player 1 has 4 strategies in the normal form associated with the Bank Run game B. Player 2 has two types C. If a player has a strongly dominated action conditional on a state happening, then that dominated action cannot be played in equilibrium in that statearrow_forwardFor each of the following scenarios, determine whether the decision maker is risk neutral, risk averse, or risk loving.a) A manager prefers a 10 percent chance of receiving $1,000 and a 90 percent chance of receiving $100 to receiving $190 for sure.b) A shareholder prefers receiving $775 with certainty to a 75 percent chance of receiving $1,000 and a 25 percent chance of receiving $100.c) A consumer is indifferent between receiving $550 for sure and a lottery that pays $1,000 half of the time and $100 half of the time.arrow_forwardDescribe the two problems arising from asymmetric information, namely: Adverse selection; and Moral hazard.arrow_forward
- Discuss the consequences of asymmetric information for Market Equilibrium.arrow_forwardThe governments role in terrorism insurance is that of - disinterested observer - innocent bystander - a reinsurance provider of last resort/ re-insurerarrow_forwardWhat is the mostly commonly used utility functions for the following and why: Risk Aversion Risk Seeking Risk Neutralarrow_forward
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