Moral hazard and adverse selection are the result of ________.

Question

Quizplus · Accepted Answer

Both moral hazard and adverse selection result from asymmetries of information, where one party has more information than the other. Moral hazard occurs when one party takes more risks because they know the other party will bear the cost of those risks, while adverse selection occurs when one party has information that is not known by the other and uses that information to their advantage. Neither prudential supervision nor excessive price fluctuations necessarily cause moral hazard or adverse selection, and government policy can have a variety of effects on these phenomena depending on the specifics of the policy.

Moral Hazard and Adverse Selection Are the Result of ________