Jim used to be very careful with his car. However, once he bought full auto insurance on it, he stopped turning on his alarm or even locking it when parking it. This is an example of adverse selection.

Question

Quizplus · Accepted Answer

This is an example of moral hazard, not adverse selection. Moral hazard occurs when someone takes more risks because they are insulated from the consequences, such as being less careful with a car because it's fully insured. Adverse selection involves a party using information that the other party is unaware of, to make a decision.

Jim Used to Be Very Careful with His Car