adverse selection


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Adverse selection

Refers to a situation in which sellers have relevant information that buyers lack (or vice versa) about some aspect of product quality.

Adverse Selection

A sociological phenomenon in which those persons with the most dangerous lifestyles or careers are the most likely to buy life insurance policies. Adverse selection may also occur if those persons conceal or falsify relevant information when they apply for the insurance policy. This has the potential of economic hardship for life insurance companies because those most likely to receive a death benefit are the ones buying policies. This reduces profit potential. Life insurance companies attempt to counteract adverse selection by limiting coverage and/or raising premiums. Adverse selection is also called antiselection.

adverse selection

the tendency for people to enter into CONTRACTS in which they can use their private information to their own advantage and to the disadvantage of the less informed party to the contract. For example, an insurance company may charge health insurance premiums based upon the average risk of people falling ill, but people with poorer than average health will be keener to take out health insurance while people with better than average health will tend not to take out such health insurance, so that the insurance company loses money because the high risk part of the population is over-represented among its clients. Adverse selection results directly from ASYMMETRY OF INFORMATION available to the parties to a contract or TRANSACTION. Where there is hidden information that is private and unobservable to other parties to a transaction, the presence of hidden information or even the suspicion of hidden information may be sufficient to hinder parties from entering into transactions.
References in periodicals archive ?
Once again, for the sake of argument, let us simply assume the plausibility of the threat posed by adverse selection critique exacerbated by publicly funded school voucher programs.
In this extended model, changes in markups and changes in adverse selection affect welfare.
Furthermore, in contrast to the previous literature, we specifically study the impact of information asymmetries concerning mortality heterogeneity and the resulting adverse selection on an insurer's risk situation and the effectiveness of risk management.
The Adverse Selection Component of the Bid-Ask Spread ([theta]), estimated using the model of George et al.
However, these arrangements by themselves do little or nothing to reduce the adverse selection problem and thus--like mandates--require additional risk adjustment mechanisms in order to function well.
Bush's proposal to exempt from income taxes up to $15,000 in health care expenses for everyone--even those not covered under employer plans--lacks compulsion, doesn't help low-income groups, does not address problems of adverse selection, and is too generous toward high-income groups.
Because equilibrium effort equals zero, quality effects do not alter seller selection decisions and, therefore, the adverse selection equilibrium.
This study examines if asymmetric information does affect health plan markets by allowing for the presence of both adverse selection and moral hazard.
Part I describes the importance ascribed to adverse selection in insurance markets by courts, regulators, and legal commentators.
Using the second hand car market as his example, Akerlof shows that when the buyers and sellers have different information about the quality of the goods (information asymmetry) this results in a problem of adverse selection on the market.
This analysis shows that too few people will purchase drug coverage when there is adverse selection and the plan can charge only one premium.
The hotel real estate market during 2001 and 2002 resembles an adverse selection market, but not due to information about properties being hard to find.