Reference no: EM13159204

Although most people with health insurance and life insurance are honest, some policyholders take advantage of having more information than the companies that insure them, which can lead to adverse selection. In addition, some people change their behavior as a result of having insurance, which economists refer to as moral hazard. Among the most conspicuous examples of behavioral change are those involving people who lie about their circumstances or take deliberate actions that endanger their own health? There are reported cases of self-mutilation in order to collect on disability insurance. Perhaps the most bizarre story concerns a town in Florida that acquired the macabre nickname of %u201CNub City%u201D in the 1970s. Over fifty people in the town suffered %u201Caccidents%u201D involving the loss of various organs and appendages, and claims of up to $300,000 were paid out by insurers. Insurance investigators are positive the injuries were self-inflicted; many witnesses to the accidents were prior claimants or relatives of the victims, and one investigator notes that %u201Csomehow they always shoot off parts they seem to need least.%u201D

a. Are asymmetric information and moral hazard involved in this incident? Briefly explain.

b. Moving beyond this particular episode, briefly discuss how do asymmetric information, adverse selection, and moral hazard affect the future of health care policy in the United States.