adverse selectionadverse selection
The tendency of sellers to substitute low-quality products for high-quality products or of a uniformly priced service, such as insurance, to attract only the least profitable customers. Adverse selection arises from the inability of buyers to differentiate between high-quality and low-quality products or of sellers to differentiate between profitable and unprofitable customers.
- (economics, business, insurance) The process by which the price and quantity of goods or services in a given market is altered due to one party having information that the other party cannot have at reasonable cost.
- It is adverse selection that leads US workers who anticipate high family medical expenditure to seek employers with superior health insurance coverage for their employees.
- The large number of "lemons" in the used-car market is the result of adverse selection.