The problem created by asymmetric information before the transaction occurs is called _______,while the problem created after the transaction occurs is called__________.

Question

Quizplus · Accepted Answer

The problem created by asymmetric information before the transaction occurs is called adverse selection, where the parties have incomplete information about the quality of the product/service being traded, leading to one party taking advantage of the other. On the other hand, the problem created after the transaction occurs is called moral hazard, where the party with more information has an incentive to take risks that the other party cannot predict or monitor.

The Problem Created by Asymmetric Information Before the Transaction Occurs