Econ in HD: Moral Hazard and Adverse Selection

An explanation of Moral Hazard and Adverse Selection using a simple example.
Enjoy!
(I am aware that the constant camera zoom adjustment is annoying. It is automatic and, for now, can't be turned off.)

[@elchonkysquirrel]

Dude you explained it better than this f'n book! Thanks!!!

[@lindachen5179]

Totally.

[@csingiling6734]

You for president plz. (girl a few hours away from writting this exam) this was a great help. merci

[@alexleon3857]

I have my Risk Management exam in two days, and this video was honestly so helpful.

[@therealphilsmith]

Glad to hear it! That is why I make the videos. Good luck.

[@lindachen5179]

Thank you for the example and visual.

[@yyyiyi]

very informative and interesting illustration, thanks for sharing.

[@awurama2380]

Thanks Phil! Awesome video...

[@articart6343]

Can one of them exist without the other ?

[@ngominh7987]

man. this video helps. Are you still on youtube anymore?

[@therealphilsmith]

Ngo Minh I am still around but don’t make these videos any more.

[@adelachroustova8728]

life saving!!! thank you so much

[@shivamshinde9904]

Very helpful bro,,thanks!!

[@Sewblon]

I have a professor who says that adverse selection and moral hazard are not proper market failures because they can not be modeled in price theory and there are no generic remedies to either of them. Do you have any thoughts on that? Can moral hazard and adverse selection be modeled in price theory? Do market failures need to be modeled in terms of price theory? Are there generic remedies to adverse selection and moral hazard?

[@therealphilsmith]

Gregory Bogosian
There are many types of market failures but the accepted definition is when the market fails to allocate resources efficiently. So moral hazard and adverse selection are not themselves market failures but are states of hidden information that can lead to market failures. The hidden information leads to incorrect pricing and inefficiencies.
Some might say that having no "bad grade" insurance is a "missing markets" failure but as the video shows it is likely just because the prices would have to set in such a way that either people would not be willing to buy the service or no one would be willing to provide it. That is pretty much in line with price theory.
Can you model it? Well, you can model anything. In this case I bet every insurance company in the world has some element in their pricing models that accounts for information/actions being hidden by their clients.

[@Sewblon]

Phil Smith
Prices having to be set in such a way that either no one would buy the product or no one would provide the product would be modeled as a scenario were a supply curve and demand curve exist, but never actually intersect, right?

[@therealphilsmith]

Gregory Bogosian That sounds right. Rather than a typical X shape of the supply/demand graph it would likely look more like a sideways Y as both demand and supply went flat (perfectly elastic) at different prices. I will see if this works in the comments.
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[@pichubstudio7090]

Thnkew sir...for clear my doubt

[@mathematicssolved]

Pretty good Phil!

[@Jmz249]

Thanks Phil

[@kendragonzalezduran5079]

Thanks!

[@niaguilar1994]

Thanks!!

[@priyankpatel96]

phil mitchell

[@TheSphongleface]

Ego world. 🚮