Asked by Nohely Ortiz on Jul 03, 2024
Verified
When an individual knows more about his or her own actions than other people do,incentives are distorted,which causes:
A) moral hazard.
B) adverse selection.
C) screening.
D) signaling.
Moral Hazard
A situation where one party engages in risky behavior or fails to act in good faith because another party bears the consequences of that behavior, often seen in insurance and financial sectors.
Incentives
Incentives or disincentives that encourage people or organizations to behave in specific manners.
- Comprehend the concept of moral hazard and how it impacts market efficiency.
- Analyze the role of information asymmetry in economic behaviors and market outcomes.
Verified Answer
MA
MUHAMMAD ABRAR BHATJul 08, 2024
Final Answer :
A
Explanation :
When an individual knows more about his or her own actions than others do, they may take risks or behave in ways that others would not approve of, knowing that they will not face the consequences alone. This is called moral hazard, and it can cause incentives to be distorted, leading to potentially undesirable outcomes. Adverse selection, screening, and signaling are not necessarily related to this specific problem of information asymmetry.
Learning Objectives
- Comprehend the concept of moral hazard and how it impacts market efficiency.
- Analyze the role of information asymmetry in economic behaviors and market outcomes.