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Adverse Selection, Gresham's Law and State Regulation

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  • Martin Ricketts

Abstract

Regulation is often justified as a response to adverse selection caused by poorly informed buyers and as a means of preventing a ‘race to the bottom’ in competitive markets. This paper argues that competitive markets respond with a variety of institutional mechanisms to problems of adverse selection and that these are often subverted by regulation. Far from Gresham's Law being associated with competitive market processes, it is actually more correctly viewed as the outcome of regulatory intervention that weakens the quality-protecting incentives that economic agents would otherwise face.

Suggested Citation

  • Martin Ricketts, 2015. "Adverse Selection, Gresham's Law and State Regulation," Economic Affairs, Wiley Blackwell, vol. 35(1), pages 109-122, February.
    • Handle: RePEc:bla:ecaffa:v:35:y:2015:i:1:p:109-122
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    File URL: http://hdl.handle.net/10.1111/ecaf.12108
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    References listed on IDEAS

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    1. Alchian, Armen A & Demsetz, Harold, 1972. "Production , Information Costs, and Economic Organization," American Economic Review, American Economic Association, vol. 62(5), pages 777-795, December.
    2. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    3. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
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    Cited by:

    1. Stephen Littlechild, 2016. "Contrasting Developments in UK Energy Regulation: Retail Policy and Consumer Engagement," Economic Affairs, Wiley Blackwell, vol. 36(2), pages 118-132, June.

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