Adverse selection occurs when:
A) one participant in a transaction has more information than another, resulting in a bargaining dispute.
B) one participant in a negotiation selects the wrong strategy, resulting in an unfavourable outcome.
C) one participant in a transaction has more information than another, resulting in less frequent transactions.
D) neither participant in a transaction is willing to make an agreement because they don't have enough information.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one participant in a transaction has more information than another, resulting in less frequent transactions because the participant with less information perceives the deal to be unfavorable. This is often seen in the insurance industry, where individuals with a higher risk of making a claim are more likely to purchase insurance, leading to higher costs for the insurer and potentially leading to the insurer refusing to provide coverage altogether.

Adverse Selection Occurs When