Adverse selection:
A)relates to unobserved characteristics of people or goods and occurs before the parties have entered into an agreement.
B)is about actions and occurs after the parties have voluntarily entered into an agreement.
C)is always present when moral hazard arises.
D)All of these statements are true.

Question

Quizplus · Accepted Answer

Adverse selection occurs before the parties have entered into an agreement and relates to unobserved characteristics of people or goods. This is different from moral hazard, which is about actions and occurs after the parties have voluntarily entered into an agreement. While adverse selection can sometimes lead to moral hazard, they are not always present together.

Adverse Selection