If Tom drives a car more recklessly after he purchases a comprehensive insurance plan, the change in his behavior is an adverse selection problem.

Question

Quizplus · Accepted Answer

The change in Tom's behavior is an example of moral hazard, not adverse selection. Moral hazard occurs when someone takes more risks because they are insulated from the consequences, whereas adverse selection refers to a situation where one party in a transaction has more information than the other, leading to a selection of risks that the less informed party would not have chosen if they had the same information.

If Tom Drives a Car More Recklessly After He Purchases