Part 1Match (by number) each concept with its description:Part 2[table]
Concept | Adverse selection | enter your response here
[/table]

Question

Part 1Match​ (by number) each concept with its​ description:Part 2[table]
Concept |  Adverse selection | enter your response here
[/table]

BlackTom AI · Accepted Answer

The prompt presents a two-part task about matching concepts with descriptions, focusing on adverse selection in Part 2. Since there are no supplied answer options in the data, I will focus on explaining why the provided description aligns with adverse selection and what this concept means in context.

First, consider what adverse selection means in markets with asymmetric information. In such environments, one party has more information than the other before a transaction occurs. This hidden information bias tends to cause certain participants—typically higher-risk or worse-than-average individuals—to self-select into a market or product they might otherwise be less suited for, precisely because their private information makes them more likely to benefit from participation than the average person.

Now turning to the given description: “Hidden-information problem before a transaction; higher-risk or worse-than-average participants are more likely to select into the market (e.g., high-risk individuals are more likely to buy insurance).” This sentence captures the core mechanism of adverse selection. The key elements are:
- Recognition of a hidden-information problem that exists before a transaction, which is the hallmark of adverse selection: the information asymmetry is present at the point of entry or enrollment.
- The assertion that higher-risk individuals are more likely to select into the market. This directly reflects the outcome of adverse selection: those with greater risk or lower expected benefits from the product are more inclined to participate, while the less-risky or average participants may be deterred or priced out.
- The example provided—high-risk individuals buying insurance—uses a classic illustration of adverse selection. Because insurers may not perfectly assess individual risk at the point of sale, those with higher risk are relatively more inclined to enroll, leading to an imbalanced risk pool.

Consider why this description correctly contrasts with other potential mischaracterizations. If one were to state that adverse selection occurs after a transaction or that information symmetry exists at entry, those statements would be inconsistent with the established theory. Similarly, describing adverse selection as primarily about moral hazard (post-transaction behavior) would mix distinct concepts; adverse selection focuses on pre-transaction information asymmetry, whereas moral hazard concerns changes in behavior after a contract is in place.

In summary, the provided description encapsulates the essential idea of adverse selection: information asymmetry before a transaction causes higher-risk individuals to self-select into the market, leading to a less favorable (riskier) participant mix, with insurance commonly cited as a classic example.

Homework:Chapter 2 Homework

Part 1Match (by number) each concept with its description:Part 2[table] Concept | Adverse selection | enter your response here [/table]

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