This chapter discusses moral hazard and adverse selection in insurance markets. Moral hazard refers to how insurance can change policyholders' behavior by reducing their incentives to prevent or minimize losses. Adverse selection refers to how asymmetric information between insurers and policyholders regarding risk levels can result in high-risk individuals being more likely to purchase insurance. The chapter examines how insurers can design contracts to mitigate these issues and provide appropriate incentives to policyholders.

1. Chapter 3 Moral Hazard and Adverse Selection