economics hard True/False

Moral hazard occurs before a transaction takes place, whereas adverse selection occurs after the transaction is completed.

  1. True
  2. False

Answer: False

The reverse is true. Adverse selection happens before the transaction (e.g., high-risk individuals are more likely to buy insurance). Moral hazard occurs after the transaction, when one party changes their behavior and takes more risks because they are protected from the consequences (e.g., driving recklessly after buying full-coverage insurance).

Topic Microeconomics - Information
Exam Relevance UPSC Prelims, SSC CGL, Banking
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