Adverse selection occurs in a market when:
A)one party has better information about actual risk.
B)both parties have an incentive to cheat on a contract.
C)the agent acts against the interests of the principal.
D)one party is unable to perform the contract as specified.
E)the cost of signaling in a market is positive.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party has better information about actual risk. This can lead to a situation where the other party is at a disadvantage and may suffer losses as a result. For example, in the market for health insurance, those with pre-existing conditions may have better knowledge about their health risks and hence are more likely to buy insurance, leading to adverse selection for the insurance companies.

Adverse Selection Occurs in a Market When