Moral Hazard

Moral Hazard: 道德风险, It is manager’s private information about effort. 2 people, the shareholder and the manager, the shareholder hires the manager to make money for him, but the shareholder cant observe the effort made by the manager. It can be then modeled as a Sequential game.

What polices may help?

• Deductibles: Pay the first $X$ fee, and the rest is free.
• Copayments: contribute $X\%$ of the cost towards treatment.

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Reference:

The Moral-Hazard Myth | The New Yorker