Asked by Brenna Caldwell on May 08, 2024
Verified
Incentives can be used to reduce both adverse selection and moral hazard.
Adverse Selection
A situation in which sellers have information that buyers do not have, or vice versa, leading to an inefficient market outcome.
Moral Hazard
A situation in which there is a tendency to take riskier behavior when protected from the consequences of that behavior, often seen in insurance and finance.
- Summarize the effects of different reward systems on adverse selection and moral hazard.
Verified Answer
RA
Rosalba AlarconMay 12, 2024
Final Answer :
True
Explanation :
Incentives can be designed to mitigate adverse selection by encouraging the disclosure of information (e.g., lower premiums for those who undergo health checks) and to reduce moral hazard by aligning the interests of parties (e.g., deductibles and co-payments in insurance contracts to encourage less risky behavior).
Learning Objectives
- Summarize the effects of different reward systems on adverse selection and moral hazard.
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