Which of the following is an application of the adverse-selection problem?
A)a customer driving more recklessly after buying car insurance.
B)a teenager "hanging out" with friends his or her parents do not approve of.
C)shareholders offering a high-powered incentive contract to a manager.
D)an auto repairman claiming that the repairs are more extensive than they actually are.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party has more information than the other party in a transaction, resulting in the uninformed party making a decision based on incomplete or asymmetric information. In this case, the auto repairman has more information about the repairs needed, and can take advantage of the uninformed customer by falsely claiming that the repairs are more extensive than necessary.

Which of the Following Is an Application of the Adverse-Selection