The problem created by asymmetric information before the transaction occurs is called ________,while the problem created after the transaction occurs is called ________.
A)adverse selection;moral hazard
B)moral hazard;adverse selection
C)costly state verification;free-riding
D)free-riding;costly state verification

Question

Quizplus · Accepted Answer

Adverse selection is the problem created by asymmetric information before the transaction occurs, where one party has more information than the other about the quality of the good or service being traded. Moral hazard is the problem created by asymmetric information after the transaction occurs, where one party may engage in risky behavior knowing that the other party will bear the cost of the negative outcomes. The other answer choices are not accurate definitions of these terms.

The Problem Created by Asymmetric Information Before the Transaction Occurs