Adverse selection is the tendency for people who accept contracts to be those who
A) buy goods and then regret it later.
B) buy goods for more than their own reservation price.
C) want to avoid the lemons problem.
D) plan to use private information to the disadvantage of the less well-informed party.
E) engage in a number of searches larger than that specified in the contract.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party has better private information than the other and uses it to their advantage. This typically leads to a situation where the more informed party (in this case, the person accepting the contract) is able to gain an unfair advantage over the less informed party. Options A, B, C, and E are not directly related to adverse selection.

Adverse Selection Is the Tendency for People Who Accept Contracts