I suggest that the terminology of “adverse selection” is unhelpful, because from a public policy viewpoint in many markets adverse selection may not be adverse. I introduce the concept of “loss coverage” as a criterion for risk classification systems. I suggest that public policy should target a socially optimal level of adverse selection, and that in many markets this means maximising the loss...

The size of adverse selection and moral hazard effects in health insurance markets has important policy implications. For example, if adverse selection effects are small while moral hazard effects are large, conventional remedies for inefficiencies created by adverse selection (e.g., mandatory insurance enrolment) may lead to substantial increases in health care spending. Unfortunately, there i...

Does adverse selection hamper the effectiveness of voluntary risk sharing? How do differences in risk profiles affect adverse selection? We experimentally investigate individuals’ willingness to share risks with others. Across treatments we vary how risk profiles differ between individuals. We find strong evidence for adverse selection if individuals risk profiles can be ranked according to fir...

We study an in…nitely repeated principal-agent model with adverse selection and renegotiation. The model is suitable for studying procurement, labor market relationships, and monopoly pricing, which is our main interpretation. A monopolist faces a consumer who has private information regarding his preferences for quality. The monopolist can o¤er long-term contracts, promising to deliver a certa...

Adverse selection is an important problem for marketers. To reduce the chances of acquiring an unprofitable customer, companies may screen prospects who respond to a marketing offer. Prospects who respond are often not approved. At the same time, prospects who are likely to be approved are unlikely to respond to a given marketing offer. Using data from a firm’s customer relationship management ...

This paper proposes a new test for adverse selection in insurance markets based on observable characteristics of insurance buyers that are not used in setting insurance prices. The test rejects the null hypothesis of symmetric information when it is possible to find one or more such “unused observables” that are correlated both with the claims experience of the insured and with the quantity of ...

1 Akerlof (1970) shows how asymmetric information can create adverse selection and undermine market efficiency. Economic and legal institutions, such as auditors, underwriters, accountants, or used-car dealers, often emerge to limit adverse selection and allow markets to function. As a result, direct government interventions are usually unnecessary. If a market does collapse, however—presumably...

This paper analyses a bilateral trade problem with asymmetric information and ambiguity aversion. There is a buyer and a seller who bargain over the exchange of an indivisible good. The seller is privately informed about the quality of the good, which determines both his valuation and the buyer’s valuation. In the absence of ambiguity, the contract that maximizes the buyer’s payoff is a posted ...

In economies with Adverse Selection the existing Competitive Equilibrium concept ([10]) imply either that the equilibrium does not exist, or that it is not necessarily efficient. We introduce and analyze, within the Rotschild and Stiglitz model of Adverse Selection, a competitive notion of equilibrium, a constrained competitive equilibrium, which yields a unique and constrained efficient alloca...