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Which of the following is not an example of adverse selection? A
Which of the following is not an example of adverse selection?
A. A person becomes less vigilant about preventing a loss once he is insured against that loss.
B. The seller of a used car has better information about the quality of the car than a prospective buyer.
C. An individual knows more about his health than an insurance company.
D. A person applying for a loan has a greater sense of her ability to repay the loan than a bank does.
Expert Solution
- The answer is: A). A person becomes less vigilant about preventing a loss once he is insured against that loss.
Adverse selection occurs when one party, engaging in an economic transaction, has more information than the other party. Adverse selection results from asymmetric information, where one party is endowed with more knowledge than the other, prior to when the contractual agreement was signed. The following are examples of adverse selection:
- B. The seller of a used car has better information about the quality of the car than a prospective buyer.
- C. An individual knows more about his health than an insurance company.
- D. A person applying for a loan has a greater sense of her ability to repay the loan than a bank does.
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