6. insurance and incentives The contracting model presented here is called a "hidden action" or

"moral hazard" model. The latter term comes from the insurance phenomenon where an insured subject has reduced care incentives.

For example, is it likely that the owner-operator of an automobile drives more diligently and less frequently when the auto’s insurance has lapsed? Is the implied delicate balancing of risk sharing, or insurance, and proper incentives present in the labor input model? Explain, using the data in Example 13.5.