Asymmetric Information - Market Failures

Four potential solutions to moral hazard

1) Cost Sharing 2) Monitoring and re-pricing 3) Contracts 4) Regulate behavior

Asymmetric Information

a situation in which one party of the transaction has more or superior information compared to another. For example, a doctor knows more about medical services than a patient

Adverse Selection

immoral behavior that takes advantage of asymmetric information before a transaction. Adverse selection occurs when asymmetric information of the actual value of a product causes only "bad" products or consumers to be selected. For example, a person who is not in optimal health may be more inclined to purchase life insurance than someone who's fine.

Ex-Post Moral Hazard (2)

involves higher utilization of a principles' resources. For example, purchasing more (and more expensive) health procedures once covered by health insurance

Ex-Ante Moral Hazard (1)

involves riskier behavior: For example, driving more recklessly after purchasing car insurance

Moral Hazard

refer to the situation when a person that takes no risk may behave differently compared to situations when they are fully exposed to risks. For example, before seats belts people drove more carefully, but now that people have seat belts and use them, they are more likely to speed and be less careful.