Carlos,who knows nothing about construction,paid Joe to remodel a room in his house.Two years later,one wall in the remodeled room crumbled because Joe used poor-quality materials.This illustrates which economic problem?
A) Adverse selection
B) Screening
C) Moral hazard
D) Signaling

Question

Quizplus · Accepted Answer

This is an example of moral hazard, where one party (Joe) has a higher incentive to take risks because they do not bear the full consequences of their actions. In this case, Joe used poor-quality materials because he knew he would not be held accountable for the consequences as Carlos did not have enough knowledge about construction.

Carlos,who Knows Nothing About Construction,paid Joe to Remodel a Room