Some racing horse breeders keep a few of their foals and sell the others. Generally, they put the poorest quality foals up for sale early in the season. Buyers have limited information about the foals up for sale, but they know that the first foals from some breeders will not be good racers. Other breeders sell all their foals. Since buyers cannot know which breeders are keeping back their good foals, they are suspicious of all foals offered for sale early in the season, lowering the sale prices. Breeders who sell all their foals are therefore forced to hold back their better foals until later in the season, to get true market prices for them. The market for foals is therefore subject to the

Question

Quizplus · Accepted Answer

The situation described in the passage is an example of adverse selection, where the lack of information about the quality of the foals being sold leads to the suspicion of all foals, lowering their market value. This creates a situation where breeders who sell all their foals are forced to hold back better foals to get better prices later in the season.

Some Racing Horse Breeders Keep a Few of Their Foals