The difference between moral hazard and adverse selection is
A)moral hazard has to do with unobservable characteristics of individuals
B)moral hazard has to do with unobservable actions of individuals
C)adverse selection is when individuals change their behaviors because of a contract
D)adverse selection is when you choose the wrong answer on a test

Question

​The difference between moral hazard and adverse selection is
A)​moral hazard has to do with unobservable characteristics of individuals
B)moral hazard has to do with unobservable actions of individuals
C)adverse selection is when individuals change their behaviors because of a contract
D)​adverse selection is when you choose the wrong answer on a test

Quizplus · Accepted Answer

Moral hazard refers to the risk that someone will take undesirable actions because they are insulated from the negative consequences of those actions. This is typically due to unobservable actions of individuals, such as a person engaging in risky behavior because they have insurance. Adverse selection, on the other hand, is when individuals with high-risk characteristics are more likely to seek out insurance or other contracts because they believe they are more likely to benefit from them. This is typically due to unobservable characteristics of individuals, such as a person with a pre-existing medical condition seeking out health insurance. Therefore, B is the best choice as it correctly identifies the nature of moral hazard.

​The Difference Between Moral Hazard and Adverse Selection Is

The Difference Between Moral Hazard and Adverse Selection Is