Adverse selection:
A) occurs when buyers and sellers have different information about the riskiness of a situation.
B) can result in failure to complete transactions that would have been possible if both sides had the same information.
C) refers to the tendency for people with higher risk to be drawn toward insurance.
D) All of these statements are true.

Question

Quizplus · Accepted Answer

All three statements are true. Adverse selection occurs when one party has more information about the risk of a transaction than the other party, resulting in incomplete or inefficient transactions. This is common in insurance markets, as people with higher risk are more likely to seek out insurance, leading to higher premiums for everyone.

Adverse Selection