Mention some of ways in which insurers control the problem of moral hazard
Insurance and other contracts often contain provisions designed to reduce the attractiveness of morally hazardous behavior. To avoid defeating the purpose of insurance, these provisions attempt to raise the costs of making claims that the policyholder can control, while still allowing recovery for major uncontrollable incidents. Co-payment or coinsurance, deductibles, and non-price exceptions are some of the provisions used by insurers to control the problem of moral hazard.
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To reduce moral hazard problems, banks include restrictive covenants in loan contracts. In order for these restrictive covenants to be effective, banks must also
A) monitor and enforce them. B) be willing to rewrite the contract if the borrower cannot comply with the restrictions. C) trust the borrower to do the right thing. D) be prepared to extend the deadline when the borrower needs more time to comply.
Administrative costs make small loans less profitable than large ones, other things equal
a. True b. False