have car insurance, you will worry less about driving or parking your car in ways that make it more likely to get

dented. In another example, a business without insurance might install absolute top-level security and fire

sprinkler systems to guard against theft and fire. If it is insured, that same business might only install a

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16.2 • Insurance and Imperfect Information 397

minimum level of security and fire sprinkler systems.

We cannot eliminate moral hazard, but insurance companies have some ways of reducing its effect.

Investigations to prevent insurance fraud are one way of reducing the extreme cases of moral hazard.

Insurance companies can also monitor certain kinds of behavior. To return to the example from above, they

might offer a business a lower rate on property insurance if the business installs a top-level security and fire

sprinkler system and has those systems inspected once a year.
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