Are the following examples of Adverse Selection or of Moral Hazard? An employee
ID: 1100501 • Letter: A
Question
Are the following examples of Adverse Selection or of Moral Hazard?
An employee who has a long-term contract with a firm stops working as hard as he
might have otherwise.
People with good health insurance make more visits to the doctor for very minor
health problems.
. A mechanic performs needless repairs on a car to increase his profit. e. Healthy people decline to purchase health insuranc
Healthy people decline to purchase health insurance
The people most likely to sign up for a dating service are losers.
Your cousin gets you to invest in his new dog-walking business, but then he just lies
on the couch all day watching DVDs.
Explanation / Answer
1. Moral hazard: An employee who has a long-term contract with a firm stops working as hard as he
might have otherwise
2. Adverse Selection: People with good health insurance make more visits to the doctor for very minor
health problems.
3. Moral Hazard: A mechanic performs needless repairs on a car to increase his profit
4. Adverse Selection: Healthy people decline to purchase health insurance
5. Adverse Selection: The people most likely to sign up for a dating service are losers.
6. Moral Hazard: Your cousin gets you to invest in his new dog-walking business, but then he just lies
on the couch all day watching DVDs.
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