Adverse selection

Adverse selection is a term commonly used in economics, insurance, and risk management that describes a situation where market participation is affected by asymmetric information. When buyers and sellers have different information, it is known as a state of asymmetric information. Traders with better private information about the quality of a product will selectively participate in trades which benefit them the most, at the expense of the other trader. A textbook example is Akerlof's market for lemons. Adverse selection is a term commonly used in economics, insurance, and risk management that describes a situation where market participation is affected by asymmetric information. When buyers and sellers have different information, it is known as a state of asymmetric information. Traders with better private information about the quality of a product will selectively participate in trades which benefit them the most, at the expense of the other trader. A textbook example is Akerlof's market for lemons.