The main problems caused by asymmetric information are
A)irrational expectations and moral hazard.
B)imperfect credibility and adverse selection.
C)adverse selection and irrational expectations.
D)adverse selection and moral hazard.

Question

Quizplus · Accepted Answer

Adverse selection refers to a situation where one party has more information than the other party, which causes the uninformed party to make a decision that is not in their best interest. In the case of moral hazard, one party has more information about the risks associated with a decision, which can cause them to take actions that are not in the best interest of the other party. Both adverse selection and moral hazard are caused by asymmetric information and can lead to significant problems. Therefore, the best choice is (D) adverse selection and moral hazard.

The Main Problems Caused by Asymmetric Information Are