If the problems of moral hazard and adverse selection still arise in financial markets if information were not asymmetric. Introduction: Asymmetric information arises wherein among the two parties involved in an economic transaction one party has more knowledge or information than the other market. It mainly arises when the seller of a product have more information than its buyer. Moral hazard refers to the problem arising due to asymmetric information as the insured individual has no incentive to safeguard from any chance of default. This induces the insurer into a greater probability of risk and default. Adverse selection refers to another problem which arises due to asymmetric information as the buyer if adversely selected increases the risk of default.

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Chapter 8, Problem 16Q

To determine

If the problems of moral hazard and adverse selection still arise in financial markets if information were not asymmetric.

Introduction:

Asymmetric information arises wherein among the two parties involved in an economic transaction one party has more knowledge or information than the other market. It mainly arises when the seller of a product have more information than its buyer.

Moral hazard refers to the problem arising due to asymmetric information as the insured individual has no incentive to safeguard from any chance of default. This induces the insurer into a greater probability of risk and default.

Adverse selection refers to another problem which arises due to asymmetric information as the buyer if adversely selected increases the risk of default.

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