Identify whether each situation is an example of adverse selection, the principal-agent problem, or neither. Your...

Identify whether each situation is an example of adverse selection, the principal-agent problem, or neither.

Your auto insurace company raises everyone's rates because of a rash of accidents. Your rate rises too, even though you haven't had an accident.
Your orthodontist says your children need braces. You don't get a second opinion. After all, why would the doctor lie?
Life insurance companies aren't always fully aware of patients' health history.
Even though you are a smoker, you have heard that if you quit for a month, insurance companies won't be able to detect nicotine in your system. You quit for a month, and you get a good rate on your insurance.
You go on a drinking binge after getting a new health insu

Expert Solution

Your auto insurance company raises everyone's rates because of a rash of accidents. Your rate rises too, even though you haven't had an accident: Principal Agent problem

Your orthodontist says your children need braces. You don't get a second opinion. After all, why would the doctor lie: Adverse selection

Life insurance companies aren't always fully aware of patients' health history: Adverse selection

Even though you are a smoker, you have heard that if you quit for a month, insurance companies won't be able to detect nicotine in your system. You quit for a month, and you get a good rate on your insurance: Principal Agent problem

You go on a drinking binge after getting a new health insurance: Principal Agent problem

Rahul Sunny answered 2 years ago

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