Asymmetric Information and Moral Hazards

C. Asymmetric information and Moral Hazards

What are moral Hazards?

Moral Hazards are when a firm decides to involve itself in a risk event, knowing that if this event will fail the firm wont incur the risk  but another party will. 

Asymmetric information:

Information Asymmetry basically deals with the study of decisions taken in a transaction, where one firm has better or more information than another. 

Asymmetric information in insurance

Another example of asymmetric information is with regard to insurance. When insuring a good the insurer is uncertain how well the customer will look after a piece of property. For example, if a consumer was careless with locking his bike, the insurer would not want to insure it. This problem can lead to the related problem of adverse selection.

To overcome asymmetric information in insurance, insurers will give big discounts for ‘no claims bonuses’ this is the best way of gaining better information about ‘careful’ and ‘unlucky’ consumers.