Asked by Madison Pepper on Sep 24, 2024
Verified
The problem the agent faces when deciding which agent to hire is called
A) Adverse selection
B) Moral hazard
C) Both of the above
D) None of the above
Adverse Selection
A situation in economics and insurance where the party on one side of the deal has more information than the party on the other side, leading to an imbalance and potentially unfair outcomes.
Moral Hazard
The risk that one party to an agreement will engage in behavior that is undesirable from the other party's perspective because it does not bear the full consequences of its actions.
- Acquire knowledge about adverse selection as a problem arising before the conclusion of a contract.
Verified Answer
SB
Suchismita Banik2 days ago
Final Answer :
A
Explanation :
The problem the agent faces when deciding which agent to hire is called adverse selection, which is the tendency for those who are more likely to produce problems (adverse events) to be more likely to seek out and engage in a particular activity than those who are less likely to do so. Moral hazard refers to the tendency for people who are not responsible for an outcome to act in ways that benefit themselves but not the party who is responsible. While moral hazard may also be a concern when hiring an agent, it is not the main problem that the agent faces when deciding which agent to hire. Therefore, the best choice is A, adverse selection.
Learning Objectives
- Acquire knowledge about adverse selection as a problem arising before the conclusion of a contract.