(Solved):Explain the concepts of moral hazard and adverse selection. View Answer…

 

Question

Explain the concepts of moral hazard and adverse selection.

 

EXPERT ANSWER

The terms moral hazard and adverse selection are both related to the risk-reward decision. A moral hazard occurs when an individual chooses a higher level of risk because s/he knows that the reward or loss will not fall back entirely on them. People who drive more carelessly because they have insurance would be an example.

Adverse selection is related to an individual

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