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PHL 295 Shareholder Capitalism 3

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University of Toronto St. George
Joseph Heath

moral hazard agency theory moral hazard - when you partake in an action that is morally destructive - hidden action problem - partaking in actions that are costly actions that are less observable are moral hazards because cost increases when you collectivize a cost people loose their incentive to minimize that cost you can use social pressure to solve this problem making actions less observable decreases the incentive to reduce cost making actions more observable increases the incentive to reduce cost What is insurance? a mechanism by which individuals who share a risk, agree to pool that cost. Best justified inn cases of low-probability. but high cost risk. losses are eradicated and a collective rescue funds are pooled risk aversion, prefer likely small cost to less likely high cost certain insurance scheme's change the nature of your actions promises of safety removes certain incentives/leads to riskier behavior every insurance scheme has the potential to create a collective action problem because the costs are spread across a group of people warranties are essentially types of insurances to correct information asymmetries insurance corp also incentive crime the more that insurance deals with human actions the more moral
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