In markets with asymmetric information,

Question

Quizplus · Accepted Answer

In markets with asymmetric information, there is a lack of information symmetry between buyers and sellers.
This can lead to adverse selection, where buyers or sellers with better information make decisions that are detrimental to those with less information. As a result, less informed participants may choose to opt-out of the market. This is adverse selection.
To counteract adverse selection, firms and individuals may engage in moral hazard. This means that some may alter their behavior in such a way that they become riskier, knowing that they can shift the risk to the other party, who is less informed. Because of asymmetric information, the less informed party may not be aware of these additional risks.
Thus, asymmetric information causes adverse selection, which, in turn, causes moral hazard.

In Markets with Asymmetric Information