Which of the following statements is correct?
A)The moral-hazard problem is a problem involving hidden actions.
B)Adverse selection is a problem involving hidden actions.
C)Adverse selection is a problem involving principals and agents.
D)Moral hazard always involves asymmetric information; asymmetric information always involves adverse selection.

Question

Quizplus · Accepted Answer

The moral-hazard problem arises when one party engages in risky behavior because they are protected from the consequences of that behavior by another party (such as an insurance company). This hidden action creates a problem for the other party, who bears the costs of the behavior. Adverse selection, on the other hand, refers to a situation where one party has better information than another party, leading to the selection of undesirable insurance risks. This does not necessarily involve hidden actions but rather hidden information. Principal-agent problems refer to situations where an agent (such as an employee) acts on behalf of a principal (such as a manager or company owner), creating potential conflicts of interest. It does not necessarily involve hidden actions or information. Finally, moral hazard and adverse selection are not always interchangeable—they are distinct issues with their own unique characteristics.

Which of the Following Statements Is Correct