Adverse selection

Adverse selection (English Adverse Selection ), also adverse selection or adverse selection, in the field of life insurance and adverse selection called, in the New Institutional Economics, a process in which it is used systematically in a market due to information asymmetry results that are not Pareto- optimal.

The first basic model for this purpose was developed in 1970 by George A. Akerlof, who has demonstrated on the used car market as it comes to the displacement of the desired provider (so-called lemons problem, Eng. Lemons problem). But Akerlof 2001 was awarded jointly with Michael Spence and Joseph E. Stiglitz, the Nobel Prize in Economics.

Information asymmetry

In the microeconomic theory of contract is between the presence of information asymmetry before or distinguished according to the contract. The problem of adverse selection concerns asymmetric information at the time of conclusion of the contract, the problem of asymmetric information after the contract see moral hazard. Information asymmetry is present when present different types of information between two economic agents, ie a relation to another has a knowledge advantage. According to the principal-agent theory, the agent (contractor ) has against the principal ( client) a knowledge advantage, so he can judge limited the performance of the agents, but also leads that he may benefit from these resources and basic this is why he instructed the agent.

Example to simplify

There are two goods to choose from, their quality is different - but the difference in quality only known to the supplier but not the demand. There are not different from the perspective of the demander the goods, he chooses the cheaper. Because of the worse quality of providers may be willing to offer it cheaper. In this way, goods are traded only with poorer quality because those with good quality can not recognize the demand and therefore is not willing to pay more accordingly.

This means the following trade will fail because of information asymmetry, although both providers and buyers would like to perform the trade: The Better Good is not purchased by buyers who would be willing, the better good to buy at a price of a provider good would accept with good quality.

The Lemons problem of Akerlof

Main article: The Market for Lemons

Be in a market for used cars is both good and bad cars ( " lemons "; corresponds roughly to the German term " Monday cars") offered. The information on the quality of the vehicles, however, is distributed asymmetrically. Only the seller does not know the quality of the cars on offer, the buyer, however.

Since the buyer so can not tell the difference between good and bad models, it will form an expectation value for the quality that lies between good and bad quality, and derive its reservation price, ie the price he is willing to pay.

For the good cars whose minimum selling price, so the reservation price of the seller is higher than the maximum of the buyer, therefore, no contract. For the sellers of " Lemons " However, the sale is attractive because their minimum selling price is below the maximum of the buyer. The good provider will be so crowded by the market, at the end of bad cars are only offered.

Insurance markets

In the insurance market, there is an information asymmetry between insurers and insured. Insurers avail themselves of the means available to limit this information asymmetry. For example, see insurance contracts provide detailed disclosure requirements, there are various contract menus ( deductibles ) are offered, etc.

Example:

Taxation

If several states with each other with different tax systems in the competition, it can also lead to adverse selection effects.

Example:

Social system

Similar arguments apply to the financing of social security measures:

These measures are supported by the above average depositing of the respective population, the current itself does not use these services and may have no direct interest in the services provided. If several states competing with each other, it can lead to a race to the bottom between these states:

• A high level of social services attracts the recipients of these services,
• The cost of this level of need of the providers of ( = net contributors ) of these services are supported. These costs will impact on this group but dissuasive.

In order for a State lures according to the theory systematically recipients of social benefits, but displaces the part of the population who could afford these services. The theory does not consider that the level of benefits may be only one aspect among many, and not only decides whether someone enters the country.

The economist Hans -Werner Sinn referred to this process as "selection principle". When states are in competition with each system, they were not able to maintain redistributive social security systems in the long run. Often, the state of New York is seen here as an example: New York had to abolish re-imported high benefits for systematic immigration of poor from other states in the United States in order to escape bankruptcy (see references). With this triggered by migration pressure is also explains why there is no comparable with Germany or other European countries social security system in the federal in this respect built up America: Even if individual states or even the entire nation would wish, leads the race to the bottom of the other States to the fact that the provision of these services is not possible.

On the occasion of the EU enlargement in 2004 this issue was discussed again in Germany. However, certain freedoms for citizens of the accession countries are immobilized for long periods of time.

Solutions

In order to prevent it from coming to a suboptimal trading volume based on this information asymmetry, various measures are available:

• Signaling or signaling: Here, the informed market participants attempt ( in Lemons example: The used car salesman ) to reduce the information asymmetry. Here, the provider of good cars have an interest to credibly distinguish themselves from the party worse car. They incur costs to produce a signal, for example a DEKRA / TUV used car seal, etc. Here, the advantages of signal production to be higher than the cost.
• Screening ( also self-selection ): This contract appropriate menus are offered, so that in each case the good providers and bad providers choose different contracts. For example, could cost offer a warranty the good provider, whilst this would be too expensive to poor providers, so that any seller who would be willing to offer a warranty, automatically would be a good provider. Another example is the full-and part - insurance contracts. Insurance premiums for comprehensive insurance are disproportionately expensive compared to partial insurance. Good risks with low probability of damage voluntarily choose the part of insurance, bad risks pull despite the higher price before the full insurance. The insurance company "filters " ( to screen ) good risks from the bad.

However, it comes with these " solutions " always cost so that the result obtained is not the market equilibrium under perfect information and thus wohlfahrtssuboptimal ( second best ) is.

(see also the general description at: . asymmetric information )

Furthermore, the information asymmetry between buyers and sellers can be reduced through the use of intermediaries (trade intermediary ). Taking advantage of economies of scale, the intermediary assumes the costs of signaling and screening. For example, the intermediary spread the costs for the acquisition of information on a very large number of buyers. Since the buyers can achieve significant cost savings through the use of intermediation performance, they are willing to pay the intermediary a commission.