Asymmetric Information- Adverse Selection Arjun Kyal
A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.
This usually takes place when the buyer or the seller wants to take advantage of the other by conning them, because of a flaw in the product.
Adverse selection is a term used in economics that refers to a process in which undesired results occur when buyers and sellers have access to different/imperfect information. The uneven knowledge causes the price and quantity of goods or services in a market to shift. This results in "bad" products or services being selected. For example, if a bank set one price for all of its checking account customers it runs the risk of being adversely affected by its low-balance and high activity customers. The individual price would generate a low profit for the bank.
The term adverse selection first came up in the insurance market when customers would give insurance companies wrong information in order to pay less premiums.
An example of adverse selection
Tom had an old phone on which part of the touch screen was unresponsive. He wanted a new phone so he decided to sell his old one and use the money to buy a new phone. When he goes to sell it the shopkeeper asks him if there are any problems with the phone. He knows that if he says that there are, he will get less money for his phone as the price would shift down, so he lies and says that there are no problems, so the shopkeeper gives him a good, wrong price for the phone. He made a 'bad selection' by choosing to buy the phone.
Works Cited
Boundless. N.p., n.d. Web. <https://www.boundless.com/economics/textbooks/boundless-economics-textbook/challenges-to-efficient-outcomes-15/sources-of-inefficiency-83/asymmetric-information-adverse-selection-and-moral-hazard-318-12415/>.
"Asymmetric Information Definition | Investopedia." Investopedia. N.p., 19 Nov. 2003. Web. 11 Jan. 2016. <http://www.investopedia.com/terms/a/asymmetricinformation.asp>.
"Adverse Selection." Bluebirdofbitterness. N.p., n.d. Web. <http://bluebirdofbitterness.com/2013/10/25/you-have-to-sign-up-for-it-to-find-out-whats-in-it-2/>.
"Adverse Selection." Dutchhealthcare.wordpress. N.p., n.d. Web. <https://dutchhealthcare.wordpress.com/2011/01/26/adverse-selection/>.
A situation in which one party in a transaction has more or superior information compared to another. This often happens in transactions where the seller knows more than the buyer, although the reverse can happen as well. Potentially, this could be a harmful situation because one party can take advantage of the other party's lack of knowledge.
This usually takes place when the buyer or the seller wants to take advantage of the other by conning them, because of a flaw in the product.
The term adverse selection first came up in the insurance market when customers would give insurance companies wrong information in order to pay less premiums.
An example of adverse selection
Tom had an old phone on which part of the touch screen was unresponsive. He wanted a new phone so he decided to sell his old one and use the money to buy a new phone. When he goes to sell it the shopkeeper asks him if there are any problems with the phone. He knows that if he says that there are, he will get less money for his phone as the price would shift down, so he lies and says that there are no problems, so the shopkeeper gives him a good, wrong price for the phone. He made a 'bad selection' by choosing to buy the phone.
Works Cited
Boundless. N.p., n.d. Web. <https://www.boundless.com/economics/textbooks/boundless-economics-textbook/challenges-to-efficient-outcomes-15/sources-of-inefficiency-83/asymmetric-information-adverse-selection-and-moral-hazard-318-12415/>.
"Asymmetric Information Definition | Investopedia." Investopedia. N.p., 19 Nov. 2003. Web. 11 Jan. 2016. <http://www.investopedia.com/terms/a/asymmetricinformation.asp>.
"Adverse Selection." Bluebirdofbitterness. N.p., n.d. Web. <http://bluebirdofbitterness.com/2013/10/25/you-have-to-sign-up-for-it-to-find-out-whats-in-it-2/>.
"Adverse Selection." Dutchhealthcare.wordpress. N.p., n.d. Web. <https://dutchhealthcare.wordpress.com/2011/01/26/adverse-selection/>.
1 comment:
Good Example,
I appreciate the use sue of pictures
How it will affect the market?
What are the possible solutions in this case?
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