Asymmetric information arises when two parties have different information, it can result in moral hazards, market failure, and adverse selection. Asymmetric information implies that one agent has better or more information compared to the other when making transactions or decisions. The flawed information creates an imbalance of power.
Asymmetric information results into problems of opportunism. Forms of Asymmetric information include; moral hazard and adverse selection. Adverse selection is depicted by an informed individual benefitting from transactions with a less informed person. Thus, some authors argue that it reduces the size of a market or eliminates it entirely (Lillo, 2013). On the other hand, Moral hazard occurs when a primed person …show more content…
This only means that an individual who supposedly values insurance highly (the riskiest individuals) effectively stands in for some of the less risky people, (those who are not willing to pay that much) (Smith, 2013). Theoretically, asymmetric information results in a sub-optimal market, regardless of whether both parties in a transaction are transacting realistically. This sub-optimality, when understood, offers motivation to businesses to undertake risks and support a more efficient result. Another natural and intuitive response is for competitors and consumers to act as observers for each …show more content…
Since people no longer bear the cost of health services, they have an increased motivation to request for more elaborate and pricier health services, which otherwise would not be essential. In these cases, people have a motivation to over consume, only because they no longer assume the complete cost of health services. Thus, two kinds of behavior could change. One kind is the risky conduct itself, ensuing in a “before the event” moral hazard. Here, the insured individuals behave in an extremely risky way, ensuing in increased negative outcomes that the insurer ought to pay for (Lillo, 2013). For instance, after acquiring an automobile insurance, some might tend to be careless about securing the automobile or decide to drive more, hence, increasing the risk of accident or theft for the
Asymmetric information results into problems of opportunism. Forms of Asymmetric information include; moral hazard and adverse selection. Adverse selection is depicted by an informed individual benefitting from transactions with a less informed person. Thus, some authors argue that it reduces the size of a market or eliminates it entirely (Lillo, 2013). On the other hand, Moral hazard occurs when a primed person …show more content…
This only means that an individual who supposedly values insurance highly (the riskiest individuals) effectively stands in for some of the less risky people, (those who are not willing to pay that much) (Smith, 2013). Theoretically, asymmetric information results in a sub-optimal market, regardless of whether both parties in a transaction are transacting realistically. This sub-optimality, when understood, offers motivation to businesses to undertake risks and support a more efficient result. Another natural and intuitive response is for competitors and consumers to act as observers for each …show more content…
Since people no longer bear the cost of health services, they have an increased motivation to request for more elaborate and pricier health services, which otherwise would not be essential. In these cases, people have a motivation to over consume, only because they no longer assume the complete cost of health services. Thus, two kinds of behavior could change. One kind is the risky conduct itself, ensuing in a “before the event” moral hazard. Here, the insured individuals behave in an extremely risky way, ensuing in increased negative outcomes that the insurer ought to pay for (Lillo, 2013). For instance, after acquiring an automobile insurance, some might tend to be careless about securing the automobile or decide to drive more, hence, increasing the risk of accident or theft for the