• Table of Contents
    • Abstract
    • Keywords
    • Article
      • Multiple Walrasian equilibria
      • Pareto improving price floors
      • Uninformed price setters and rationing
      • Informed price setters
      • Self-selection in insurance markets
      • Efficient public provision of insurance
    • See Also
    • Bibliography
    • How to cite this article

adverse selection

Charles Wilson
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by Steven N. Durlauf and Lawrence E. Blume
Alternate versions available: 1987 Edition
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A market exhibits adverse selection when the inability of buyers to distinguish among products of different quality results in a bias towards the supply of low-quality products. Typically, the average quality of a product supplied by the market depends on the price, possibly resulting in multiple Walrasian equilibria and even equilibria with rationing. Agents have an incentive to trade multidimensional contracts so that informed agents can reveal their quality by the contracts they purchase. Various mechanisms such as price floors and mandatory partial insurance may be used to reduce the market inefficiencies resulting from adverse selection.
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How to cite this article

Wilson, Charles. "adverse selection." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 14 December 2017 <http://www.dictionaryofeconomics.com/article?id=pde2008_A000040> doi:10.1057/9780230226203.0011

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