The principal-agent problem is an example of the adverse selection problem that can result from asymmetric information.

Question

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The principal-agent problem is an example of moral hazard, not adverse selection. It arises when there is a conflict of interest between a principal (such as an employer or shareholder) and an agent (such as an employee or manager), particularly when the agent has more information than the principal. Adverse selection, on the other hand, occurs before a transaction takes place, when potential buyers and sellers have asymmetric information.

The Principal-Agent Problem Is an Example of the Adverse Selection