When homeowners sell a house, part of the paperwork they complete is a statement of disclosure on which the homeowners are supposed to reveal everything that they know is wrong with the house. The purpose of the statement of disclosure is to try to solve the
A)principal-agent problem.
B)moral-hazard problem.
C)adverse-selection problem.
D)signaling problem.

Question

Quizplus · Accepted Answer

The statement of disclosure helps to address the adverse-selection problem in the market for housing. Adverse selection is the problem of information asymmetry between buyers and sellers, where sellers have more information about the quality of the house than buyers. By requiring the seller to disclose any known issues with the house, potential buyers are better informed and less likely to be surprised by unexpected problems after purchasing the home.

When Homeowners Sell a House, Part of the Paperwork They