Which of the following is NOT an example of adverse selection?
A)A family with a home ten feet from a large river buys flood insurance.
B)A company uses the proceeds of a new stock sale to build an unnecessarily luxurious new headquarters.
C)A terminal cancer patient buys life insurance.
D)A company in serious financial trouble offers to pay you 30% on a loan.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party has more information than the other and uses that information to their advantage. In A, the family knows they live near a river and are more likely to experience a flood, so they buy flood insurance. In C, the cancer patient knows they are more likely to pass away soon and wants to provide for their loved ones, so they buy life insurance. In D, the company in financial trouble is more likely to default on the loan, but offers a high interest rate to entice lenders. However, in B, the company building a luxurious headquarters may not be intentionally withholding information, nor are they taking advantage of an information asymmetry.

Which of the Following Is NOT an Example of Adverse