Which of the following statements is correct? Adverse selection arises when one

Question

Which of the following statements is correct?

Adverse selection arises when one party to a transaction hides information from the other.

Moral hazard arises when one party to a transaction hides actions/behavior to the other.

Moral hazard leads to insured customers exercising less care than they would if they were not insured.

All of the above.

Adverse selection arises when one party to a transaction hides information from the other.

Moral hazard arises when one party to a transaction hides actions/behavior to the other.

Moral hazard leads to insured customers exercising less care than they would if they were not insured.

All of the above.

Explanation / Answer

Selection becomes adverse when one party seems to be having more information than the other and so it may hide it. Similarly moral hazard can occur when one party has more incentive to indulge in actions or behaviour that is not convincing or the suitable for the other party. This indicates that moral hazard arises when one party hides his or her action from the other and becomes less care if they are insured. This implies that all the options are correct and option d is chosen.

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