Economics • Economic BasicsMedium
What does 'Moral Hazard' refer to in information economics?
A. The tendency of people with higher risk profiles to seek out insurance more aggressively before a contract is signed.
B. A situation where one party takes on greater risk because they are insulated from the negative consequences, often due to asymmetric information after a contract is signed.✓ Correct Answer
C. The intentional misrepresentation of product quality by a seller in a market with asymmetric information.
D. The exploitation of common pool resources leading to their eventual depletion.
💡 Solution & Explanation
Moral hazard arises when an economic agent takes on greater risk because insurance or external guarantees insulate them from the full negative consequences of their actions, typically occurring after a contract is signed due to asymmetric information. Adverse selection, by contrast, occurs before the contract is finalized.
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