Auto insurer Progressive Insurance recently implemented a new program. Policyholders who agree to voluntarily install a Snapshot telematics device in their car receive a small discount on their car insurance premium. The Snapshot device records distance, time of day, speed, and hard braking activity in much the same way as an airplane’s black box, and reports that information to Progressive. Customers with good driving habits receive a substantial discount on their insurance; those with bad habits may see their premiums increase.

a. Explain how the Snapshot device helps Progressive overcome adverse selection.

b. Explain how the Snapshot device helps Progressive overcome moral hazard.