If reckless drivers are more likely than safe drivers to buy automobile insurance, then a moral hazard problem has occurred.

Question

Quizplus · Accepted Answer

This situation describes adverse selection, not moral hazard. Adverse selection occurs when there is asymmetric information before a transaction, leading riskier individuals to be more likely to purchase insurance. Moral hazard, on the other hand, occurs after a transaction when the behavior of the insured party changes due to the insurance coverage.

If Reckless Drivers Are More Likely Than Safe Drivers to Buy