36 Adverse Selection

Discover why good quality, low-risk participants might vanish from a market. This video explains adverse selection, a phenomenon rooted in asymmetric information where one party possesses superior knowledge about hidden characteristics before a transaction occurs. We'll explore how this leads to market inefficiencies, using the examples of the second-hand car market and the insurance industry to illustrate how favorable participants can be driven out, leading to a market dominated by lower-quality or higher-risk individuals. This can result in market failure where mutually beneficial trades fail to materialize due to the inability to accurately assess true quality or risk. Visit AxiomTutoring.com and subscribe to @AxiomTutoringCourses.