Which of the following statements is correct?
A)Hidden actions and hidden characteristics are both associated with the moral-hazard problem.
B)Hidden actions and hidden characteristics are both associated with the adverse-selection problem.
C)Hidden actions are associated with the moral-hazard problem, whereas hidden characteristics are associated with the adverse-selection problem.
D)Hidden actions are associated with the adverse-selection problem, whereas hidden characteristics are associated with the moral-hazard problem.

Question

Quizplus · Accepted Answer

Hidden actions refer to the situation where one party takes actions that are not observable by the other party, leading to the moral hazard problem. On the other hand, hidden characteristics refer to the situation where one party has private information about their characteristics (such as health status) that the other party does not know, leading to the adverse-selection problem. Therefore, option C is the correct answer as it associates hidden actions with the moral-hazard problem and hidden characteristics with the adverse-selection problem.

Which of the Following Statements Is Correct