Asked by Keion Ouseley on Sep 24, 2024
Verified
________is the problem of separating good from bad drivers
A) Moral hazard
B) Adverse selection
C) Decision making
D) None of the above
Adverse Selection
A situation in financial markets where buyers and sellers have different information, leading to transactions that favor the party with more information.
Good Drivers
Good drivers refer to individuals who operate vehicles safely, adhering to traffic laws and regulations, and minimizing the risk of accidents.
Bad Drivers
Individuals who consistently engage in unsafe driving behaviors, such as speeding, not adhering to traffic signals, or distracted driving.
- Analyze the contrast between moral hazard and adverse selection.
- Describe the impact of information asymmetry on the emergence of moral hazard and adverse selection issues.
Verified Answer
CN
Clara Natalie2 days ago
Final Answer :
B
Explanation :
Adverse selection refers to the problem of asymmetric information where one party has more information than the other, leading to the other party making a bad decision. In the case of insurance, adverse selection refers to the problem of separating good from bad drivers. This is because bad drivers are more likely to apply for insurance than good drivers, leading to the insurance company having a higher risk of payouts. To mitigate this risk, insurance companies may use several methods such as risk-based pricing and underwriting.
Learning Objectives
- Analyze the contrast between moral hazard and adverse selection.
- Describe the impact of information asymmetry on the emergence of moral hazard and adverse selection issues.