Make cases when insurance is or is not included. Analyze your results. Do your initial results change, i.e., does having insurance give the person an incentive to drive without caution?

Module 3 Assignment: Moral Hazard and Uncertainty

AI Moral Hazard and Uncertainty

Solve the case of moral hazard and uncertainty. See table below.

Driving carefully carelessly Prob. loss Prob. loss

accident 0.25 $10.000 0.75 $10,000 no accident 0.75 0 0.25 0

1. Make cases when insurance is or is not included. Analyze your results.
2. In both cases, alter the probabilities of having an accident or not if you drive carefully or not. Specifically, you have a 30% chance of having an accident if you go carefully and a 70% chance of not having an accident if you drive carefully. Invert these percentages if you drive carelessly.
3. Do your initial results change, i.e., does having insurance give the person an incentive to drive without caution?