Moral hazard:
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

Moral hazard is about the actions that occur after parties have entered into an agreement. It refers to the risks that one party takes because they know the other party will bear the cost of their actions. It is different from adverse selection, which relates to unobserved characteristics of people or goods and occurs before the parties have entered into an agreement. Option A refers to adverse selection, not moral hazard. Option C is incorrect because moral hazard may not always be present in every situation.

Moral Hazard