Adverse selection concerns hidden knowledge about _____, while moral hazard concerns hidden knowledge about _____.
A) systematic risk; idiosyncratic risk
B) attributes; actions
C) equity finance; debt finance
D) financial markets; financial intermediaries

Question

Quizplus · Accepted Answer

Adverse selection refers to the situation where one party has more information about their attributes (e.g. health status for insurance) than the other party, leading to an imbalance of information. Moral hazard, on the other hand, refers to the situation where one party has more information about their actions (e.g. how much risk they are taking on in an investment) than the other party, leading to a potential for opportunistic behavior.

Adverse Selection Concerns Hidden Knowledge About _____, While Moral Hazard