Our discussion of adverse selection and moral hazard included many examples. For each of the scenarios...

Our discussion of adverse selection and moral hazard included many examples. For each of the scenarios listed below, tell me whether it is an adverse selection or moral hazard problem. Then, explain why the problem exists. Do not simply rewrite the statement, explain the asymmetric information problem.

When you have mortgage loan on your house, the lender requires you to have homeowners’ insurance.

When you apply for life insurance, you are required to pass a physical exam.

Expert Solution

Case of a mortgage loan:
It is an example of moral hazard where home owners take the mortgage loan upon their home. If something happens to the home such as fire or some other damage, then the lender will suffer. To prevent this scenario, the lender asks the homeowners to take insurance so that any damage to the home is recovered.

Case of life insurance:
It is a case of adverse selection where insurer feels that there can be an asymmetry of information and an insurance company may not know the in-depth details of the health status of the individual. It means that there are difference in the information owned by the insurer and the person to be insured. In this scenario, the insurance company can ask the person to go for the physical examination and prove his fitness before a life insurance is issued to him.

Rahul Sunny answered 2 years ago

What are adverse selection and moral hazard?

Provide a discussion of the two issues, Adverse Selection and Moral Hazard, and how these two...

Provide a discussion of the two issues, Adverse Selection and Moral Hazard, and how these two behaviors raise the cost within a health care system.

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

Identify each of the following as an adverse selection or a moral hazard problem: Instructions: In...

Identify each of the following as an adverse selection or a moral hazard problem: Instructions: In each case, very briefly (one sentence or two) state the reason for your choice. a) A person with car insurance fails to lock his car doors when he shops at a mall. b) A person with family history of cancer purchases the most complete health coverage available. c) A person with health insurance takes more risks on the ski slopes of Aspen than he...

Explain the difference between moral hazard and adverse selection. Discuss three examples of features of the...

Explain the difference between moral hazard and adverse selection. Discuss three examples of features of the labor market that can be explained as features that ameliorate moral hazard in the employer – employee relationship

In each of the following cases, identify whether the problem is adverse selection or moral hazard...

In each of the following cases, identify whether the problem is adverse selection or moral hazard and explain your answer. How might the problem be dealt with? Rick has gotten a large advance to write a textbook. With the money in hand, he prefers spending his time sailing rather than sitting in his office working on the book. Justin is trying to get a large advance to write a textbook. He knows, but publishers don’t, that he did poorly on...

In each of the following cases, identify whether the problem is adverse selection or moral hazard,...

In each of the following cases, identify whether the problem is adverse selection or moral hazard, and explain your answer. How might the problem be dealt with? Rick has gotten a large advance to write a textbook. With the money in hand, he prefers spending his time sailing rather than sitting in his office working on the book. David is trying to get a large advance to write a textbook. He knows, but publishers don’t, that he did poorly on...

Question

Our discussion of adverse selection and moral hazard included many examples. For each of the scenarios...

Solutions

Expert Solution

Related Solutions