Adverse selection or the principal-agent problem

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Analyze the situations involving risk below to determine if they involve Moral Hazard (M), Adverse Selection (A), or the Principal-Agent Problem (P). For Moral Hazard write “M” in the blank. For Adverse Selection write “A” in the blank. For the Principal-Agent Problem write “P” in the blank. (1 pt. EACH; 5 pts. TOTAL)

a. Only the owners of sick pets purchase pet health insurance.

b. A mechanic tells you that you need new brakes, but you refuse to buy new brakes because you’re afraid she might be trying to rip you off.

c. In the season after signing a big contract, an athlete no longer gives his/her full effort, leading to a productivity drop from the previous year.

d. Bureaucrats have more information than politicians and may use that information to further their own interests.

e. Seeing that his passenger is a tourist, a taxicab driver takes a longer route to the destination in order to collect a higher fare.

Reference no: EM131159678

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