Updated on May 30, 2024Table of Contents
Adverse selection is a problem that occurs when one party to a transaction has more information than the other party and uses that information to take advantage of the other party.
What is meant by adverse selection?
Adverse selection occurs when one party in a transaction has more information than the other, leading to an imbalance in decision-making. This often results in higher-risk individuals or entities participating in a market, while lower-risk ones opt out, creating a less favorable environment for the other party, such as insurers or lenders.
What is an example of adverse selection?
A common example of adverse selection is in health insurance. People who are more likely to need medical care, such as those with pre-existing conditions, are more likely to buy comprehensive health insurance, while healthier individuals might choose not to buy insurance, raising the costs for the insurer.
What is adverse selection in medical terms?
In medical insurance, adverse selection refers to a situation where individuals with higher health risks are more likely to purchase health insurance, while healthier individuals may forgo coverage. This leads to higher costs for insurers, as they are covering more high-risk individuals than low-risk ones.
What is an example of adverse selection in the market?
In the used car market, adverse selection occurs when sellers have more information about the condition of their cars than buyers. This can lead to higher-quality cars being driven out of the market because buyers, unsure of car quality, are only willing to pay lower prices, leaving only low-quality cars available.
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