How insurance markets lead to mutually beneficial trades of risk. Concept information: Adverse selection refers to a situation where one party involved in trade has all the information about the product being traded while, the others do not. In other words, the problem of adverse selection results from the asymmetric information in the market. Moral Hazard refers to a situation where one party provides misleading information to the other party and changes his behavior about protecting the good after being insured from the risk. For example, after taking a life insurance policy the insured party becomes careless about his life and takes more risks. This is a situation of moral hazard.

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Chapter 20, Problem cWYWL

To determine

How insurance markets lead to mutually beneficial trades of risk.

Concept information:

Adverse selection refers to a situation where one party involved in trade has all the information about the product being traded while, the others do not. In other words, the problem of adverse selection results from the asymmetric information in the market.

Moral Hazard refers to a situation where one party provides misleading information to the other party and changes his behavior about protecting the good after being insured from the risk. For example, after taking a life insurance policy the insured party becomes careless about his life and takes more risks. This is a situation of moral hazard.

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