Question

In: Economics

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.

Solutions

Expert Solution

Answer - Since in the given problem , the assymetric information and the change in behaviour of one party is occuring after they have come into the contract for maintaining the lawn , this will be called a Moral Hazard. This would have been adverse selection if this change occured before they came into contract for the maintainance of lawn. Since , beforehand , no change occured , but after they both agreed , the change in behaviour of owner occured and he was late for his home , the day they service it , it will be called a moral hazard and not the adverse selection.


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