Asked by Varuna Sharma on Jun 09, 2024
Verified
Moral hazard and adverse selection are similar asymmetric information problems but moral hazard involves hidden actions while adverse selection involves hidden characteristics.
Moral Hazard
A situation where one party engages in risky behavior knowing that they are protected from the consequences by another party.
Adverse Selection
A situation where asymmetric information results in high-risk individuals being more likely to select into or remain in a contract designed for low-risk individuals, affecting insurance markets and other transactional relationships.
Asymmetric Information
A situation in which one party to a transaction has more or superior information compared to another.
- Acknowledge the distinction between moral hazard and adverse selection.
Verified Answer
Learning Objectives
- Acknowledge the distinction between moral hazard and adverse selection.
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