Asked by Jackson Hooper on Jun 04, 2024
Verified
One difference between moral hazard and adverse selection is
A) Moral hazard has to do with unobservable characteristics of individuals
B) Moral hazard has to do with unobservable actions of individuals
C) Adverse selection is individuals change their behaviors because of a contract
D) Adverse selection is when you choose the wrong answer on a test
Moral Hazard
A situation where one party is more likely to take risks because the negative consequences of the risk will be borne by another party.
Unobservable Actions
Actions taken by parties in a contract or agreement that cannot be directly observed or monitored by others.
Adverse Selection
A situation in which sellers have information that buyers do not, or vice versa, leading to an inefficient market outcome.
- Identify the differences between moral hazard and adverse selection.
Verified Answer
MJ
Mary Joy BarreraJun 06, 2024
Final Answer :
B
Explanation :
Moral hazard refers to situations where one party takes on more risk because they know they are protected, often due to the actions being unobservable by the other party. Adverse selection, on the other hand, deals with the problem of asymmetric information before a transaction occurs, where one party has more or better information than the other.
Learning Objectives
- Identify the differences between moral hazard and adverse selection.