Some sellers of used cars provide warranties to buyers,with the aim of reassuring buyers that the car is of good quality.These warranties help reduce the chance of what occurring?

Question

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The provision of warranties by sellers of used cars helps reduce adverse selection, which is the tendency of buyers to preferentially choose low-quality goods in a market where quality is uncertain. By providing a warranty, the seller is signaling that the car is of good quality, reducing the asymmetry of information between the buyer and seller that leads to adverse selection.

Some Sellers of Used Cars Provide Warranties to Buyers,with the Aim