Adverse selection occurs in a market when:
A) one party has better information about pertinent risks.
B) both parties have an incentive to cheat on a contract.
C) the agent acts against the interests of the principal.
D) one party is unable to perform the contract as specified.
E) the cost of signaling is prohibitive.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party has better information about pertinent risks. This can lead to an imbalance in the information between the buyer and seller, resulting in the selection by the seller of only those buyers who are less prone to risk. This can lead to an uneven distribution of the good or service, with only those buyers who are less prone to risk being able to purchase the good or service.

Adverse Selection Occurs in a Market When