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.
Want to see the full answer?
Check out a sample textbook solutionChapter 8 Solutions
The Economics of Money, Banking and Financial Markets (11th Edition) (The Pearson Series in Economics)
- Principles of Economics (12th Edition)EconomicsISBN:9780134078779Author:Karl E. Case, Ray C. Fair, Sharon E. OsterPublisher:PEARSONEngineering Economy (17th Edition)EconomicsISBN:9780134870069Author:William G. Sullivan, Elin M. Wicks, C. Patrick KoellingPublisher:PEARSON
- Principles of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage LearningManagerial Economics: A Problem Solving ApproachEconomicsISBN:9781337106665Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike ShorPublisher:Cengage LearningManagerial Economics & Business Strategy (Mcgraw-...EconomicsISBN:9781259290619Author:Michael Baye, Jeff PrincePublisher:McGraw-Hill Education