Find an example of each of the following: moral hazard problem, asymmetric information problem, and the...

Find an example of each of the following: moral hazard problem, asymmetric information problem, and the adverse selection problem. Explain how each leads to an overallocation or underallocation for society. How can each be fixed?

Solutions

Expert Solution

Answer -

The moral hazard problem in economic is a risk that the client or party had not good faith in entering business or contract or it provided manipulating or misleading information about the credit cpacities or liabilities etc.For example Before the 2008 financial crisis , when there is burst bubble in housing , the lenders action can be understood as moral hazard .Like through the use of incentive such as commision to originate as many loans irrespective of the financial means of borrower .As the intention is to sell this loan to investor and shifting the lending institution away from risk , the lender and the mortage broker gains the financial profit from the risk increment but the burden of risk resulted fall on the investors.Borrowers who started to make payment of mortage also had experienced the moral hazard.

Asymmetric information problem is the information failure which happens when one of the party possesses large material knowledge then other parties.OR when the seller posseses greater knowledge than the consumer who is buying goods and services.All the economic related transaction involve the information asymmetric problem.FOR EXAMPLE , there is a tockbroker having knowledge and it is more valuable than the professional who is non investing like say for example farmer who is only interested in trading stocks confidentially to prepare for retirement.Only alternative to this problem is for the worker to have the study of all the fields aprt from specializing in only one field .

The Adverse selection problem generally incur when one of the party who is negotiating has relative information which the other party is lacking.It leads to doing more business with high risk and less profit . For example a manager of company is willingy issue the share when overhauling of price of share happen in comparison to real value .In this the buyer will end up buying it and will lose all money .Also example the seller charge the buyer more despite of disclosing the defect in the car .Avoiding adverse selection requires recognization of group of people who are more at risk thanthe general people

HAVE A GOOD DAY! !

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Find an example of each of the following: moral hazard problem, asymmetric information problem, and the...

What kind of problems are the following: Asymmetric information, moral hazard problem or adverse selection problem?...

What kind of problems are the following: Asymmetric information, moral hazard problem or adverse selection problem? Match each with the situations below.Government insurance on bank deposits may encourage banks to make risky loans.A woman anticipating having a large family takes a job with a firm, which offers exceptional childcare benefits.Doctors prescribing more healthcare than is necessary.

Determine if the asymmetric information problem is adverse selection or moral hazard. Then briefly explain the...

Determine if the asymmetric information problem is adverse selection or moral hazard. Then briefly explain the structure of the asymmetric problem for each. Football Season Insurance offers to reduce the premium on its auto insurance policies to drivers who install/activate a monitoring device on their cars.

Determine if the asymmetric information problem is adverse selection or moral hazard. Then briefly explain the...

Determine if the asymmetric information problem is adverse selection or moral hazard. Then briefly explain the structure of the asymmetric problem for each. You are very busy and hired a service to maintain your lawn. Because of travel, you are unlikely to be home the day they service it.

Are the concepts of Moral Hazard and Asymmetric Information useful for economic analysis?

What does the term “Asymmetric Information” mean? What is a moral hazard and what are the...

What does the term “Asymmetric Information” mean? What is a moral hazard and what are the two groups involved? Give an example. What is meant by adverse selection? Who is involved? Give an example.

adverse selection and moral hazard are both examples of asymmetric information. True of False

Which of the following is NOT an example of moral hazard?

Which of the following is NOT an example of moral hazard? a. a person buys insurance only after finding out that he or she is at high risk. b. a person is less careful about driving after purchasing collision insurance. c. an unemployed worker stays unemployed an extra week, collecting more unemployment insurance, even though a job is available. d. a person only goes to the doctor after finding out that the visit will be covered by insurance.

We have discussed the issue of asymmetric information that results in moral hazard and adverse selection...

We have discussed the issue of asymmetric information that results in moral hazard and adverse selection problems. Now, consider the following situation. You are uncomfortable lending money to your neighbor. However, when the bank that you have an account with lends funds to him/her, you are more comfortable. Why is that the case? Why would banks have an advantage? Explain your answer using the problems mentioned above.

Give an example of adverse selection problem and an example of moral hazard problem. Explain how...

Give an example of adverse selection problem and an example of moral hazard problem. Explain how the financial intermediaries can help in avoiding these kind of problems and reducing the cost of asymmetric information.

Subjects