adverse selection
Hidden information disadvantage
Adverse selection is a market phenomenon where one party in a transaction has information the other lacks, leading to skewed outcomes.
The classic example is insurance: people who know they're high-risk are more likely to buy coverage, while insurers can't easily distinguish them from low-risk customers.
Adverse selection in the used car market means sellers know which cars are lemons.
The term appears throughout economics and finance to describe how information asymmetry distorts who participates in a market.
- lemonAcidic yellow citrus
- death spiralSelf-worsening loop toward ruin
- competitive marketMany sellers, price-taking firms
- credit riskPotential for borrower nonpayment
- used carsPreviously owned vehicles for sale
buyer beware · asymmetry · market failure · price discrimination · mismatch · screening · signaling · risk · underwriting · high-risk · pre-existing conditions · insurance contracts · insurance fraud · deductible · disclosure · coverage · unraveling · premiums
- insuranceinsurance, coverage, auto insurance, life insurance, home insurance
- market economicsmonopoly, oligopoly, perfect competition, duopoly, monopsony
- economic problemsmarket failure, recession, inflation, deflation, stagflation
- theories & lawssupply and demand, law of demand, law of supply, Parkinson's law, Peter principle
- incentive theorymoral hazard, principal-agent, signaling, screening, shirking
- economicssupply and demand, inflation, GDP, GNP, gross domestic product
selection, advertising, adverse, advertisement, adversity, advertiser, advert, inadvertent, adversely