Adverse Selection
Adverse Selection
Adverse selection (pronunciation: /ædˈvɜːrs sɪˈlɛkʃən/) is a term used in Economics and Insurance to describe a market process in which undesired results occur when buyers and sellers have access to different or asymmetric information. This typically happens when the seller has more information than the buyer, potentially leading to a poor selection of goods or services.
Etymology
The term 'adverse selection' was first used in the insurance market by economist George Akerlof in his 1970 paper "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism". The term is derived from the adverse or negative effects that can occur due to a selection process that is influenced by asymmetric information.
Related Terms
- Asymmetric Information: This is a situation where one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer.
- Moral Hazard: This refers to the risk that one party has not entered into the contract in good faith or has provided misleading information about its assets, liabilities, or credit capacity.
- Information Economics: This is a branch of economics that studies how information and information systems affect an economy and economic decisions.
- Risk Pooling: This is a practice used by insurance companies to spread financial risks among a large number of people to reduce the cost to individuals.
See Also
External links
- Medical encyclopedia article on Adverse Selection
- Wikipedia's article - Adverse Selection
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