Abstract
A market exhibits adverse selection when the inability of buyers to distinguish among products of different quality results in a bias towards the supply of low- quality products. Typically, the average quality of a product supplied by the market depends on the price, possibly resulting in multiple Walrasian equilibria and even equilibria with rationing. Agents have an incentive to trade multidimensional contracts so that informed agents can reveal their quality by the contracts they purchase. Various mechanisms such as price floors and mandatory partial insurance may be used to reduce the market inefficiencies resulting from adverse selection.
This chapter was originally published in The New Palgrave Dictionary of Economics, 2nd edition, 2008. Edited by Steven N. Durlauf and Lawrence E. Blume
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Wilson, C. (2008). Adverse Selection. In: The New Palgrave Dictionary of Economics. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-349-95121-5_104-2
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DOI: https://doi.org/10.1057/978-1-349-95121-5_104-2
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Publisher Name: Palgrave Macmillan, London
Online ISBN: 978-1-349-95121-5
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Chapter history
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Latest
Adverse Selection- Published:
- 12 April 2017
DOI: https://doi.org/10.1057/978-1-349-95121-5_104-2
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Original
Adverse Selection- Published:
- 11 October 2016
DOI: https://doi.org/10.1057/978-1-349-95121-5_104-1