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QUESTION 16 Adverse Selection is what type of transaction risk? ex post (after) O ex ante (prior) ceteris paribus quid pro qu

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Question 16

ex-ante

In adverse selection, the advantage from asymmetric information comes before the contract is signed. For e.g. insurance market. An individual has better idea of his/her health and lifestyle than the seller of the policy. The individual can take advantage of this and sign the contract.

Question 17

ex-poste

In moral hazard, the change in behavior occurs after a contract has been signed. For instance, after buying fire insurance, the home owners may be less careful. They may not changes smoke detector batteries on time. Therefore, the asymmetry comes AFTER the contract.

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