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Adverse Selection vs. Moral Hazard
Adverse selection and moral hazard are two distinct problems arising from asymmetric information. Adverse selection is a pre-contractual issue caused by 'hidden attributes,' where one party has private information about their characteristics before a deal is made. In contrast, moral hazard is a post-contractual issue caused by 'hidden actions,' where one party's unobservable behavior changes after the deal is made.
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The Economy 2.0 Microeconomics @ CORE Econ
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Information Asymmetry within a Firm's Hierarchy
Asymmetric Information in Principal-Agent Problems
The Problem of Incomplete Contracts
George Akerlof
Inadequate Property Rights as a Cause of Externalities
Informational Barriers to Government Intervention on Externalities
Adverse Selection vs. Moral Hazard
Hidden Attributes
Hidden Actions
Signalling (Economics)
Screening (Economics)
Signalling (Economics)
Screening (Economics)
Imperfect Information and Price Dispersion Online
Pareto Inefficiency from Asymmetric Information
Missing Market (Definition)
Verifiable Information (Definition)
Health Insurance Market Scenario
Match each scenario with the specific type of information problem it best illustrates.
Analyzing Interest Rate Policy and Inequality
A software company hires a freelance developer on a fixed-fee contract for a six-month project. After the contract is signed, the company cannot perfectly monitor the developer's daily effort. The developer, knowing their work is not closely observed, puts in less effort than promised, leading to a lower-quality final product. Which economic problem does this situation best illustrate?
Comparing Market Problems from Information Imbalances
Analyzing Information Imbalance in a Service Market
Explaining Equilibrium with Mixed Motivations
The problem of moral hazard arises primarily because one party in a transaction has private, pre-contractual information about the hidden characteristics of a good or service, which the other party cannot observe.
A skilled artisan produces handcrafted wooden chairs of exceptional durability, a quality that is not apparent from a visual inspection. Potential buyers are hesitant to pay the high price the artisan asks because they cannot distinguish these chairs from visually similar, but less durable, mass-produced alternatives. Which of the following strategies would be most effective for the artisan to overcome this information imbalance and justify the premium price?
Evaluating the Severity of Market Failure from Information Imbalances
Learn After
A key problem in economics occurs when one party in an interaction has more or better information than the other. This can lead to two distinct issues based on whether the information is hidden before or after an agreement is made. Match each scenario below to the specific problem it best illustrates.
Distinguishing Market Problems from Information Gaps
Match each scenario with the specific problem caused by asymmetric information that it best illustrates.
A person who obtains a comprehensive car insurance policy may subsequently be less cautious about where they park their car or how they drive, knowing that the financial costs of theft or an accident are largely covered. This scenario is a primary example of adverse selection.
Insured Driver's Risky Behavior