Topic 6 Flashcards
refers to the fact that “bad types” are likely to be selected in transactions where one party is better informed than the other. Examples include higher risk individuals being more likely to purchase insurance, more low-quality cars (lemons) being offered for sale, or lazy workers being more likely to accept job offers. Adverse selection is a precontractual problem that arises from hidden information about risks, quality, or character.
Adverse selection
A____ consumer values a lottery at its expected value.
Risk neutral
A____ consumer values a lottery at less than its expected value.
Risk adverse
People are more willing to buy an insurance product when:
They face greater risk
_____a solution to the problem of adverse selection that describes the efforts of a less informed party to gather information about the more informed party.
Screening
When offering insurance to groups with different risk profiles:
Insurers tend to cater products to the higher risk group.
____ describes the efforts of the more informed parties (consumers) to reveal information about themselves to the less informed party (the insurance company)
Signaling
E-commerce platforms, like Amazon.com, restrict their sites to high quality sellers by:
Banning sellers from offering inducements for favourable reviews.
A_____ is an investor who is willing to take on additional risk for an investment
Risk lover
Moral Hazard occurs when:
People are more likely to decide on a course of action when they do not bear the costs of the decision.
Insured customers:Exercise____ care because they have____incentive to do so.
Less, less
Progressive’s Snapshot addresses moral hazard by:
Tying customers’ insurance premiums to how careful they drive.
Insurers protect themselves from moral hazard by:
charging premiums based on higher risks due to customers not taking precautions they would have if uninsured.
