Which of the following is a screen against adverse selection? Insurance companies require homeowners to have...

Which of the following is a screen against adverse selection?

Insurance companies require homeowners to have smoke detectors
Rearview cameras in cars.
Installing engine monitors to track driving habits of the insured.
Prospective secretaries must take a typing test before being hired.

Solutions

Expert Solution

Option D.

Adverse selection usually occurs due to difference in the information available to two parties involved in a transaction.

This can lead to a well informed party taking advantage of the party with less information.

Screening is a process to prevent adverse selection problem and is undertaken by a party with less information.

In the above scenario, prospective secretaries taking a typing test before being hired is considered as a screen against adverse selection as it helps them in rectifying their asymmetry.

Rahul Sunny answered 1 year ago

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