On which problem would the internet have a greater impact, adverse selection or moral hazard?

The problem the internet would have a greater impact on when comparing adverse selection and moral hazard is adverse selection. Because of the way the internet is used daily in our society, consumers are able to utilize its capabilities to more evenly balance the information between buyers and sellers. The frequency at which this happens creates an overall greater impact.

Expert Answers

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Adverse selection refers to asymmetric information that exists between a buyer and seller before a deal has been reached. A moral hazard refers to asymmetric information that exists between buyers and sellers after the deal has been finalized. The difference is in the timing.

In this way, the internet most impacts adverse selection because it has the capacity to level the playing field from the start. If buyers and sellers have fairly equal information, it is more likely for the most fair deal to be reached.

Consider a person who seeks to purchase a used car. Without the internet, it would be taxing to determine the value of any particular car. There are now many websites available that can help calculate both the buying and selling points of cars based on make, model, year, mileage, condition, and other factors. It is also possible for a potential buyer to obtain a history of the car's usage in order to determine whether it has been involved in any accidents or whether it has been used as a fleet vehicle. With such information, a buyer is given much more power to accurately negotiate a fair selling point for the car.

The internet thus empowers people every day in decisions such as these. The impact is greater because it is more often utilized. E-commerce has been steadily on the rise as people increasingly turn to the internet for their purchasing needs. Within this trend lies an ongoing and increasing ability for buyers to research companies, compare products, and read reviews in order to obtain the most information possible about purchases from cars to vacuums to pets. This daily assists buyers and presents the ability for more symmetrical information between buyers and sellers.

Last Updated by eNotes Editorial on December 3, 2020
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