Question

In: Economics

Which of the following make(s) insurance premiums higher than otherwise? a. adverse selection and moral hazard...

Which of the following make(s) insurance premiums higher than otherwise?

a.

adverse selection and moral hazard

b.

adverse selection, but not moral hazard

c.

moral hazard, but not adverse selection

d.

neither adverse selection nor moral hazard

Solutions

Expert Solution

The correct option will be a) adverse slection and moral hazard.

Both are assymetric information and both the problem create losses more than otherwise due to some hidden information.

There is a difference between Adverse selection and moral hazard, but premium increase in both the situations.

Moral hazard occurs when there is asymmetric information between two parties and change in the behavior of one party after a deal is taken place. Adverse selection occurs when there's a lack of symmetric information prior to a deal between a buyer and a seller.


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