How do adverse selection and moral hazard arise at different times?
Hidden type precedes contracting and calls for screening or signaling; hidden action follows contracting and calls for incentives or monitoring.
Follow the cause and effect
Separate hidden information before trade from hidden action after contracting.
Write utility from each action and the outside option.
Design prices, deductibles, bonuses, or monitoring to satisfy the required constraint.
The model you are using
Conditions for this model
Bonus example: risk-neutral agent, success bonus B, no fixed salary and outside option zero.
The exam trap
Unequal information alone does not identify adverse selection; determine whether type or action is hidden and when.
Connect the reasoning to the graph
What changes
- A contract menu can be drawn in coverage–premium space, where single crossing supports self-selection.
What stays fixed
Bonus example: risk-neutral agent, success bonus B, no fixed salary and outside option zero.
Keep these conditions throughout the comparison; change only what the case above specifies.
What to inspect
Design prices, deductibles, bonuses, or monitoring to satisfy the required constraint.
Compare before and after, and locate the conclusion on the graph.
5 MINUTES · TRANSFER THE IDEA
Can you explain it without the lesson?
Classify used-car warranties and health-insurance deductibles by the information problem they address.