Moral Hazard and Adverse Selection in Today’s Economy
Adverse selection is a problem in today’s economy that arises due to moral hazard.
Moral hazard is when one person known as the agent (e.g.) an employee, tends to
slack off or make less of an effort in the job required of them, and when another
person called the principal (e.g.) an employer, cannot monitor them correctly.
Moral hazard is extremely evident in the job circuit today. Salary.com released a
Wasting Time Survey in 2013 asking employees in a wide range of different
occupations and different age groups how they spend their working day. The results
came back stating that on average, 34% of employees spend 30 minutes or less each
day in an 8.5 hour shift wasting time or doing nothing, 24% spend between 30-60
minutes and 11% spend several hours wasting time in their work day. During this
time they either chat to colleagues or use the internet for topics that are not workrelated. Moral hazards do not necessarily have to take place in an office situation.
There have been reported examples of babysitters being caught neglecting a child on
hidden ‘nanny’ cameras, a step taken by the parents of the child to try and prevent
moral hazard from occurring. Moral hazard can also take place outside the
workplace. For example, individuals who have insurance cover may behave more
carelessly than they usually would as a result of having that insurance cover (e.g.) a
person with health insurance may not look after their health as well as an individual
without health insurance.
Moral hazard can cause adverse selection which is when one person is better
informed than another in a situation, and certain firms or companies end up with a
bad outcome as a result of this. An example of this would be in car insurance. The
insurer has no idea whether the driver of the car is a safe or reckless driver. The
driver, wanting to get insured, would most likely not be honest with the insurance
company about their driving and this may then cause them to insure a reckless driver.
The market for cars is a prominent example of adverse selection. The seller of a
vehicle will know more about the vehicles faults or problems than the buyer and may
choose to hide that information in order to make a sale on their vehicle. If a consumer
buys a car with a &?&?V??F?B6"?2F?V????v?2( ??V???( ????vF?2?6??7V?W'0?&R?v?26WF??W2v?V?'W???r?FV?2F?B&R??B'&?B??Wr2&W7V?B?bF??0?v?V???r&?&?V??F??2F?V??VG2F?&?6W2G&???rG&?F?6????6V6??B??B6?W0?WfV??bF?R?FV??2???6?W?R?bvVV?2??B2F?R'W?W'2v???F????F?R6V??W'0????r6??WF???r&?WBF?R?FV?F?BF?W?F???B?&VfW&V?6R?&??v?WfV???#2?*6?'??6????GG???wwr?6?'??6???#2?v7F??r?F??R?B?v?&??7W'fW???6?FR?"??#??#0??