The adverse selection problem arises in situations when the policyholders engage in risky activities that increase the probability of an insurance payoff.

Question

Quizplus · Accepted Answer

The adverse selection problem arises when there is asymmetric information before a transaction occurs, leading to a situation where higher-risk individuals are more likely to purchase insurance, not because they engage in risky activities after purchasing the policy.

The Adverse Selection Problem Arises in Situations When the Policyholders