Quick Definition

Adverse selection refers to a situation where sellers have information that buyers do not, or vice versa, leading to transactions that favor the party with more information.

Examples

• 1In health insurance, individuals who know they will need more medical care are more likely to buy insurance, leading to higher costs for insurers.
• 2In the used car market, sellers of cars with hidden defects are more likely to sell at standard prices, disadvantaging buyers.
• 3In life insurance, individuals with high-risk lifestyles or poor health that is not disclosed may secure lower premiums, increasing costs for the insurer.

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