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.
Adverse selection Akerlof, G. Asymmetric information Bertrand game Credit rationing Incentive compatibility Insurance markets Pareto improvement Rationing Resale markets Reservation price Self-selection Separating equilibrium Signalling Walrasian equilibria
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