According to Wikipedia.com,former Philippines President Marcos authorized construction of a new nuclear power plant on a known earthquake fault line in the province of Bataan.The projected $500 million power plant was to be constructed by Westinghouse.The project was backed by EXIR-a U.S.government-backed Export Credit Agency-which guaranteed the Philippine loan to Westinghouse.The actual cost of the completed project was $2.3 billion.Westinghouse was paid despite the fact that the nuclear plant never went online since it was built on a fault line.This is an example of:

Question

Quizplus · Accepted Answer

This scenario illustrates moral hazard - specifically, the incentive for Westinghouse to overcharge the Philippines for a non-functional nuclear power plant, since they were backed by a U.S. government agency that guaranteed the loan to the Philippines. This guarantee diminished the risk to Westinghouse of not getting paid, and therefore may have motivated them to inflate the costs of the project. It is not an example of signaling, screening, or adverse selection.