Explain how moral hazard arises in each of the following situations: (a) A mother promises her daughter
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(a) A mother promises her daughter that she will help her with her homework during the coming school year but only if the daughter has difficulty with her homework.
(b) An individual's house is insured against damage by fire for its full value.
(c) An individual is appointed to manage an investment portfolio for a group of coworkers.
(d) The same individual in part (c) is appointed to manage the investment portfolio, and the government guarantees that all investors in the group will receive a 5% return per year.
That is, the government will make up the difference if the return on the portfolio falls below 5% in a given year.
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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a The child is more likely to report having trouble ...View the full answer
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