Explain how moral hazard arises in each of the following situations:
(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.

  • CreatedDecember 05, 2014
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