A person who generally drives without a seat belt on does not reveal this to his automobile insurance company before he purchases insurance.This is an example of
A)adverse selection.
B)moral hazard.
C)signaling.
D)screening.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other and uses this information to their advantage. In this case, the driver has information that he or she is less safe because of not wearing a seat belt, but does not reveal this to the insurance company. This creates adverse selection because the insurance company is not aware of the increased risk and may charge a lower premium than they would otherwise.

A Person Who Generally Drives Without a Seat Belt on Does