Moral Hazard, Asymmetric Information, Adverse Selection
Moral hazard, asymmetric information, and adverse selection have been huge problems for a long time. They benefit only one side when making an agreement. Both moral hazard and adverse selection are main causes of asymmetric information.
Moral hazard is giving harm to someone else by using the asymmetric information. The guarantee for the retirement age of a professor is one example of moral hazard. When professors finish their 6 years of assistant professor, they receive tenure after getting judged for their performances. If they do get tenure, they can have enough time to study and research important things. It means, if they at least make a small result, they won’t have any problem. There are many cases of professors working lazily after getting tenure. To prevent it, schools can introduce a piece rate system, making a standard as the average amount of studies that is done in one year.
Adverse selection is choosing a wrong choice based on asymmetric information. For example, financial companies often choose customers who do not have an ability to pay back the money that the companies have lent. Customers who can pay the money back have many choices of different financial companies, but customers who can’t pay back the money don’t. Not knowing the fact, financial companies lend a large sum of money to customers with no ability to pay back the money.
We can’t fix this problem of moral hazard and adverse selection since the asymmetric information will never disappear. To get a profit for themselves, people will always hide the truth that can make them disadvantage. But since they all are customers, they will also want a bigger range of choices they can choose and for that, giving a little more information will help a lot.
