Adverse Selection

Market unraveling when better-informed parties self-select into trades priced on average risk.

Specifications & Metrics

type

Information economics

introduced

1970

originator

George Akerlof

Core Principles & Analysis

• Akerlof's The Market for Lemons (1970) showed used-car prices collapse when buyers cannot tell quality.
• Warranties, mandatory disclosure, and risk-pooling mandates counteract the unravelling.
• It explains why the sickest customers are the keenest buyers of insurance priced on average risk.

Sources

• Wikipedia: Adverse selection