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Too much trade: A problem of adverse selection

Author

Listed:
  • de Meza, David
  • Reito, Francesco
  • Reyniers, Diane

Abstract

It is shown that uni-dimensional adverse selection may result in market expansion beyond the full-information level. Although bad types tend to drive out good, enough good types may remain to draw in excessive numbers of bad types. As a result, the welfare loss from adverse selection is potentially underestimated. Applications are made to insurance, credit and the used car market.

Suggested Citation

  • de Meza, David & Reito, Francesco & Reyniers, Diane, 2021. "Too much trade: A problem of adverse selection," MPRA Paper 107084, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:107084
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    File URL: https://mpra.ub.uni-muenchen.de/107084/1/MPRA_paper_107084.pdf
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    References listed on IDEAS

    as
    1. de Meza, David & Webb, David C., 2017. "False diagnoses: pitfalls of testing for asymmetric information in insurance markets," LSE Research Online Documents on Economics 65744, London School of Economics and Political Science, LSE Library.
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    More about this item

    Keywords

    asymmetric information; adverse selection; welfare.;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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