Question

Adverse Selection (int-pt 3)

See if you can find an article that mentions "adverse selection" and then summarize the main points of the article in your own words. Provide a link/citation, too.

Answer 1

https://www.iei.liu.se/nek/730g83/artiklar/1.328833/AkerlofMarketforLemons.pdf

The link above provides Akerlof's original paper on the market for lemons. This says that the sellers of cars have perfect information on the quality of cars but buyers do not. So out of a total population of cars, there is a certain proportion of good quality cars and some bad quality cars. The buyer at the point of purchase will not know what the true quality of a car is and hence he may make a wrong choice. This is the problem of adverse selection. Akerlof in his paper referred to this as the market for lemons representing the wrong information in the hands of the purchasers. This is the problem of adverse selection.