00:01
Let's start by distinguishing between moral hazard and asymmetric information.
00:06
Moral hazard is when unwanted behavior happens due to coverage, right? due to insurance or removal of incentive more generally, right? i speed my car because the seatbelt makes me feel really safe.
00:33
I make risky bets in financial markets because i know that if i go wrong, the government will bail out my bank.
00:41
These are what we think of as moral hazard problems.
00:46
An asymmetric information problem is when selection occurs based on unobservables.
01:01
So this is sort of like the used car market is full of bad cars because people who have crummy cars face more.
01:09
Incentives to sell them.
01:10
People who buy health insurance tend to be sicker because they know they need the health insurance more, right? people are choosing a behavior or choosing an action based on something they know that the other person is not.
01:22
So let's walk through these and try to try to select them.
01:28
So ill person buys insurance.
01:33
This is a classic asymmetric information.
01:40
I guess i could just put a.
01:42
It's a just tells me to mark a.
01:44
Why is this asymmetric information? it's because the insurance company doesn't know, presumably.
01:53
You might say that this person is doing something bad, but this person is not engaging in anything that is destroying value.
02:01
They're not making any bad decisions.
02:03
The insurance policy that they're buying is simply a transfer of wealth from the insurance company to them.
02:10
It is not actually destroying anything, right? the insurance company is presumably unaware of this terminal illness.
02:17
And so because the insurance policies company can't observe that, we have an asymmetric information problem...