Recognizing the existence of asymmetric information

Complete the following table by determining which economic problem is characterized in each of the scenarios provided.

Scenario

Adverse Selection | Moral Hazard for each

(a) When Ginny didn't have renter's insurance, she was very careful not to leave candles lit in her apartment and locked the door when she left. Now that she has renter's insurance, she typically leaves candles burning all day and forgets to lock the door because she knows that, even if her apartment catches on fire or gets broken into, her insurance will cover it.

(b) Kenji would like to buy a used plasma television, but he is not an electronics expert and, thus, cannot assess the quality of a TV directly before owning it. Kenji believes that owners of the worst TVs are more willing to sell their TVs than owners of the best TVs. Because of this, Kenji believes that used TVs up for sale are probably of low quality.

Moral hazard happens when people have incentives to take unusual risks. This is known as a problem of asymmetric information ex-post, which means that happens after a person takes the action, in this case happens after Ginny got the insurance. For example, now she takes the risk of having a fire in her apartment.

Adverse selection happens when there are two or more parties and one of them has more information than the other. In this case, the seller has more information (about used plasma TVs) than Kenji. This asymmetry of information often leads people to take bad choices. In this case, is probable that Kenji offers his TV at price lower than he should. This is known (in most cases) as a problem ex-ante, which means that it occurs before the person takes the action.