Adverse Selection

Adverse selection is a market situation, studied in economics, insurance and risk management, in which asymmetric information lets one party take advantage of information the other side cannot see, gaining more from a contract or trade than it otherwise would. In an ideal market, buyers pay according to their genuine willingness to pay and sellers charge according to true product quality; when one side holds hidden information it can exploit that gap, including through concealment, and the uninformed side may respond by withdrawing from the market, demanding different prices, or refusing to trade at all, which reduces overall trade and competition. The economist George Akerlof's 1970 paper The Market for Lemons illustrated the effect using the used car market: sellers of poor quality cars can sell at the same price as sellers of good cars, so good-car sellers eventually leave the market, average quality and prices fall further, and the market can deteriorate substantially as a result. The problem has been discussed in life insurance since the 1860s, and the phrase adverse selection itself has been in use since the 1870s. This description is adapted from Wikipedia contributors under CC BY-SA 4.0; changes were made. https://creativecommons.org/licenses/by-sa/4.0/