Econ 101 Homework 8

Econ 101 Homework 8 - 1. Define moral hazard and adverse...

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1. Define moral hazard and adverse selection. Give examples of each. Moral Hazard: opportunism characterized by an informed person taking advantage of an uninformed person through an unobserved action. Anthony also free climbs but his wife makes him get insurance. So she gets him insurance, lots of it, and he free climbs Adverse selection: opportunism characterized by an informed persons benefiting from trading or otherwise conduction with a less informed person who does not know a lot of the unobserved characteristics of the informed person. John climbs mountains without safety devices, but purchased lots of life insurance and the insurance company has no idea that he is a free climber 2. Define signaling and screening. Give examples of each. Signaling - an action taken to inform a less informed person Employees signal the level of their skills to employers by acquiring a certain degree of education. Screening
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Econ 101 Homework 8 - 1. Define moral hazard and adverse...

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