Firemen in Sicily have been creating fires, to be paid cash to put them out.
Read about it here and then answer the following questions.
Questions:
- What is wrong about the design of the firemen's contract?
- Explain the concept of MORAL HAZARD
- How would your re-design their contract to minimise this risk?
- Are there any other examples of moral hazard you can think of that you may have come across?