Asked by Libbi Rogers on Sep 24, 2024
Verified
Which of the following is a possible solution to the adverse selection problem?
A) Screening
B) Signaling
C) All of the above
D) None of the above
Adverse Selection
Adverse selection is a situation in economics where one party in a transaction has more information than the other, often leading to an imbalance and unfavorable outcomes for one side.
Screening
A solution to the problem of adverse selection that describes the efforts of a less informed party to gather information about the more informed party. A successful screen means that it is unprofitable for bad types to mimic the behavior of good types. Any successful screen can also be used as a signal.
Signaling
A solution to the problem of adverse selection that describes an informed party’s effort to communicate her type, risk, or value to less informed parties by her actions. A successful signal is one that bad types won’t mimic. Any successful signal can also be used as a screen.
- Acquire knowledge on how screening and signaling serve as mechanisms to counteract adverse selection in insurance contexts.
Verified Answer
Learning Objectives
- Acquire knowledge on how screening and signaling serve as mechanisms to counteract adverse selection in insurance contexts.
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