Asymmetric information in a transaction can result in:
A) moral hazard.
B) adverse selection.
C) a lemons problem.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

All three options are potential outcomes of asymmetric information in a transaction. Moral hazard occurs when one party takes excessive risks because they know the other party will bear the cost if something goes wrong. Adverse selection occurs when one party has more information about the quality of a good or service than the other, leading to the possibility of the lower quality option being chosen. The lemons problem specifically refers to the market for used cars, where the seller has more information about the condition of the car than the buyer, potentially leading to an unfair price.

Asymmetric Information in a Transaction Can Result In