Think about a person’s age. Each person knows his or her own age, but this fact is generally not known to others with much precision, except for close friends and relatives (and they often forget, too). Looks can deceive, so people need to provide independent proof of age in the form of government-issued identification for various purposes, such as to purchase alcoholic products or to purchase life and health insurance. Let’s focus on the latter.
An important aspect of life and health insurance is the age of the insured. Without documentation, each person clearly has an information advantage over others regarding his or her own age, so there is information asymmetry-. Is this a case of adverse selection or moral hazard? Explain.