Adverse selection means that:

Question

Quizplus · Accepted Answer

Adverse selection refers to the tendency of individuals to select their best actions based on their private information, which can create a situation where one party has more information than the other and can take advantage of it. This can lead to a breakdown in the market or, in the case of insurance and financial markets, higher costs and lower efficiency. Option A is incorrect because it describes mimicking behavior rather than adverse selection. Option B describes the conditions under which a firm might issue equity but does not define adverse selection. Option D describes random selection behavior, which is not necessarily adverse.

Adverse Selection Means That