The problem of adverse selection arises when the owners of a security have a(n):
A)incentive to misbehave after an asset purchase.
B)incentive to behave according to expectations.
C)incentive to give potential buyers bad information.
D)disincentive to give potential buyers bad information.

Question

Quizplus · Accepted Answer

Adverse selection occurs when the seller has a private information advantage over the buyer, and for this reason, the seller may purposely disclose false information to the buyer or conceal important information. Therefore, the owners of a security may have an incentive to give potential buyers bad information to manipulate the price of the security.

The Problem of Adverse Selection Arises When the Owners of a Security