Question

Referring to the economy.

Define the term moral hazard problem and describe an example of a moral hazard problem in the credit market or in the banking and insurance sector.

Explain why your salary is endogenous? Endogenous to which factors, specifically?

The wage of a Starbucks employee in Chicago, USA, is higher than a Starbucks employee in Queretaro, Mexico. Let's assume that there are no differences in labor productivity (technologies are the same and the workers are equally efficient). Why might there be a wage difference? Why don't wages equalize?

Answer 1

1 - Moral hazard is the condition in which the person is ready to take the risk on his own after knowing the fact that he is being protected by certain policy or a third party will pay for his losses.

These hazard mostly arise in the insurance sector. If a person has taken the insurance of his car , he is more likely to do rash driving because he knows that upon the loss , he will be able to recover the value from insurance company. This is called the moral hazard.