In each case identify whether the situation is a case of adverse selection or moral hazard. Explain.

a. Jasper knows, but the car rental company does not know when he is trying to rent a car during a blizzard in Wisconsin, that Jasper grew up in a tropical climate and has no idea how to drive in cold weather and snowy conditions.
b. Joan has received a loan from the bank to finance the purchase of more inventory for her quilt shop, but she intends to use the money (without telling the bank) to take a safari in Africa.
c. Some companies sell annuities, which are policies that make periodic payments as long as the purchaser lives. Jane is trying to buy an annuity. Jane knows, but the annuity issuers do not know, that people in Jane's family routinely live to age 100 .

Question

In each case identify whether the situation is a case of adverse selection or moral hazard. Explain.

a. Jasper knows, but the car rental company does not know when he is trying to rent a car during a blizzard in Wisconsin, that Jasper grew up in a tropical climate and has no idea how to drive in cold weather and snowy conditions.
b. Joan has received a loan from the bank to finance the purchase of more inventory for her quilt shop, but she intends to use the money (without telling the bank) to take a safari in Africa.
c. Some companies sell annuities, which are policies that make periodic payments as long as the purchaser lives. Jane is trying to buy an annuity. Jane knows, but the annuity issuers do not know, that people in Jane's family routinely live to age 100 .

Quizplus · Accepted Answer

The Answer of In each case identify whether the situation is a case of adverse selection or moral hazard. Explain.

a. Jasper knows, but the car rental company does not know when he is trying to rent a car during a blizzard in Wisconsin, that Jasper grew up in a tropical climate and has no idea how to drive in cold weather and snowy conditions.
b. Joan has received a loan from the bank to finance the purchase of more inventory for her quilt shop, but she intends to use the money (without telling the bank) to take a safari in Africa.
c. Some companies sell annuities, which are policies that make periodic payments as long as the purchaser lives. Jane is trying to buy an annuity. Jane knows, but the annuity issuers do not know, that people in Jane's family routinely live to age 100 .

In Each Case Identify Whether the Situation Is a Case