Adverse selection:
A)relates to actions and occurs after parties have voluntarily entered into an agreement.
B)is always present when moral hazard arises.
C)relates to unobserved characteristics of people or goods and occurs before parties have entered into an agreement.
D)All of these statements are true.

Question

Quizplus · Accepted Answer

Adverse selection relates to the problem of asymmetric information before a transaction occurs, where one party has more or better information than the other about some important aspect of the transaction, such as the quality of the product being sold or the riskiness of an insurance applicant. This can lead to a situation where the party with less information is at a disadvantage, and the market can become skewed or even fail. It is distinct from moral hazard, which occurs after a transaction has been completed and involves actions that one party might take that could negatively affect the other party.

Adverse Selection