I understand what Moral Hazard is (people taking risks because they won’t be the ones paying the costs if it goes badly), but I don’t understand what it has to do with Asymmetric/Imperfect Information
In: Economics
The big issue is how moral hazard interacts with insurance under imperfect information. Moral hazard is a problem in insurance because people are more likely to take risks once those risks are covered by insurance. However, this wouldn’t be important if the insurance company could perfectly observe the risks each person takes. In that case, all insurance could be fairly priced by charging higher premiums to the people who took more risks. If information is imperfect, the insurance company must settle for pricing based on what it can observe, which allows some people to take risks it can’t observe.
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