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Adverse selection

Adverse selection occurs when the expected value of a transaction is known more accurately by the buyer or the seller due to an asymmetry of information; e.g. health insurance. This is also known as the ‘hidden attributes’ problem i.e. someone with a long-established health condition might be able to hide it from a health insurance company.

Adverse selection is a market phenomenon that occurs when the parties in a transaction have asymmetric information, meaning that one party has more or better information than the other party. This can lead to an imbalance in the transaction, as the party with the advantage can use their superior information to make decisions that are not in the best interest of the other party.

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