Which of the following statements is (are) TRUE?
I. Moral hazard can either increase or decrease the likelihood of an insurance claim.
II. Moral hazard is the result of asymmetric information.
III. Insurance coverage sets up moral hazard because people don't respond to the incentives offered by the coverage.
A) I
B) I and II
C) III
D) II

Question

Quizplus · Accepted Answer

Moral hazard is primarily the result of asymmetric information, where one party has more information than the other, leading to changes in behavior after a transaction. Statements I and III are incorrect because moral hazard typically increases the likelihood of an insurance claim, and it arises because people do respond to the incentives offered by insurance coverage, often by taking more risks.

Which of the Following Statements Is (Are) TRUE