Students often have trouble distinguishing between adverse selection and moral hazard. Both concepts are rooted in asymmetric information among different parties in a transaction or contract. Both contribute to risk and these risks arise from a specific source - asymmetric information

In this Module's forum, I would like you to engage with each other to clarify your understanding of these concepts.

Discuss the prevalence of asymmetric information in insurance contracts, in lending, and investment...

Discuss adverse selection. Any examples?

Discuss moral hazard. Any examples?

How are the two different?

When you apply at a financial institution for a loan, you are asked to fill out extensive loan applications, provide detailed financial information, provide loan collateral, etc. In addition, you may find that the money is dispensed to you as you meet certain performance criteria (for example, as in a construction loan). Discuss how the loan approval and distribution process reduces risks to the financial institution associated with both adverse selection and moral hazard.