Adverse selection costs arise from ______.
A) differential taxes
B) information asymmetries
C) large bid-ask spreads
D) the perfect market assumptions
E) None of the above

Question

Quizplus · Accepted Answer

Adverse selection costs arise from information asymmetries, which occur when one party in a transaction has more information or better knowledge than the other party, leading to an imbalance of power and potentially negative consequences for the less-informed party, such as higher costs or lower quality. Differential taxes, bid-ask spreads, and perfect market assumptions do not necessarily relate to adverse selection.

Adverse Selection Costs Arise from ______