Finance School of Management Real-world Limitations to efficient Risk Allocation Transactions costs g Incentive problems moral-hazard: having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss adverse selection: those who purchase insurance against risk are more likely than the general population to be at risk uesTc30 Finance School of Management Real-world Limitations to Efficient Risk Allocation ❖ Transactions costs ❖ Incentive problems – moral-hazard: having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss. – adverse selection: those who purchase insurance against risk are more likely than the general population to be at risk