(Solved):Explain what is the difference between adverse selection and moral hazard. View Answer…

 

Question

Explain what is the difference between adverse selection and moral hazard.

 

EXPERT ANSWER

Moral hazard is seen when a party is ready to take more risks as it does not have to bear the full cost of these risks. For example, if someone has insured their car, they might indulge in reckless driving.

On the other hand, adverse selection is seen when one party in a transaction has more information than the other

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