The difference between moral hazard and adverse selection is that moral hazard is about:
A) unobserved characteristics of people occurring before parties enter into an agreement.
B) never happens when adverse selection is a problem.
C) actions that arise after the parties enter an agreement
D) None of these statements is true.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party changes their behavior or actions after entering into an agreement, usually because they know they are not fully responsible for the consequences of those actions. Adverse selection, on the other hand, is about unobserved characteristics of people before entering into an agreement, such as their risk level or health status. Option A describes adverse selection, and Option B is incorrect as both moral hazard and adverse selection can occur together or separately. Option D is incorrect as one of the statements is true.

The Difference Between Moral Hazard and Adverse Selection Is That