Adverse selection is a situation in which one party, as a result of a contract, has an incentive to alter their behavior in a way that harms the other party to the contract.

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Adverse selection refers to a situation where one party in a transaction has more information than the other, often leading to the less informed party making a poor decision. The scenario described is more akin to moral hazard.

Adverse Selection Is a Situation in Which One Party, as a Result