Final answer:
Businesses can reduce the risk of imperfect information by offering guarantees and relying on reputation, occupational licensing, and certifications. Insurance companies reduce moral hazard by conducting fraud investigations and incentivizing businesses to maintain high-security standards. Monitoring and external verification of security systems also contribute to lowering business risks.
Step-by-step explanation:
To reduce business risk associated with imperfect information, a business can use various strategies. Businesses can reassure buyers and reduce uncertainty about the price, quantity, and quality of products by providing guarantees, warrantees, and service contracts. In markets like emeralds or used cars, where imperfect information is common, reputation becomes a critical asset. Additionally, occupational licenses and certifications can ensure competency in the labor market, while cosigners and collateral serve as safeguards in financial transactions.
Regarding insurance and the concept of moral hazard, insurance companies can mitigate risk by conducting investigations to prevent fraud and by encouraging behaviors that reduce risk. For instance, a business might receive lower property insurance rates if they install and regularly inspect top-level security and fire sprinkler systems. Such practical measures contribute to maintaining a minimum level of security and ensuring safety.