What Is Meant By Adverse Selection?

What Is Meant By Adverse Selection?

1 Answer

  1. To explain adverse selection, I would like to start by explaining what asymmetric information is. Generally in any transaction there are two parties involved, and if one party has greater knowledge than the other party. It can also be called information failure. Now adverse selection is just a case of information failure or asymmetric information. According to the definition: Adverse selection refers generally to a situation in which sellers have information that buyers do not have, or vice versa, about some aspect of product quality. Broadly speaking, adverse selection occurs when one party in a negotiation has relevant information the other party lacks. The asymmetry of information often leads to making bad decisions, such as doing more business with less-profitable or riskier market segments.

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