How an understanding of adverse selection and moral hazard can help us better understand financial crises. The greatest financial crisis faced by the United States was the Great Depression, from 1929 to 1933. Go to http://www.amatecon.com/greatdepression.html. This site contains a brief discussion of the factors that led to the Great Depression. Please help writing a summary explaining how adverse selection and moral hazard contributed to the Great Depression.
This is a really complex issue, even for economists that have studied the interactions of moral hazard and adverse selection as related to the Great Depression for decades. Each main contributing factor of the Great Depression leads to how adverse selection and moral hazard further contributed to the Great Depression. There are several factors that tie in as the main causes of the Great Depression, one of which was the stock market crash in 1929. Many people believe that the Great Depression happened solely because the market crashed, which is not the case. It was definitely a contributing factor. In addition, banks began to fail because they became less and less willing to secure loans, which had the direct effect of dropping the bank's profits.
As the banks became less willing to secure loans from the start of what we see as adverse selection, the banks began to fail, and ...
This solution gives a detailed discussion regarding moral hazard and adverse selection, and how it can help us better understand a financial crisis.