decisions · games
Moral hazard
Once the loss is covered, the careful choice gets less careful.
With no insurance, a crash costs the driver, so the risk stays low. Full insurance pays for the crash. The yellow shield is that cover, and the bar is how much risk the driver takes.
Risk taken: low
The green figure is the driver. The red car is the crash. The yellow bar is the risk they choose to take.
While the driver pays for the crash, more risk is expensive, so the bar stays short.
Full insurance moves the bill off the driver. The shield comes on, the crash can still happen, and the same driver takes more risk.
That change is moral hazard. The road did not get safer. The bill moved.
A deductible leaves part of the crash on the driver, so some of the careful choice remains.
The principal–agent problem is the same shift: you hire someone, the loss falls on you, and their reward is not the same as yours.