introduction

Question 1

what are the components of information asymmetry

Answer 1

adverse selection and moral hazard

Question 2

define adverse selection and give an example

Answer 2

one party uses private information to own advantage, and at the disadvantage of the other party
- example: insider trading

Question 3

define moral hazard and give an example

Answer 3

one party has an incentive after an agreement to act in a manner that brings them additional benefits, at the expense of the other party
- example: managers shirking