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Adverse Selection, Seller Effort, and Selection Bias


  • Bradley S. Wimmer

    () (Department of Economics, University of Nevada Las Vegas)

  • Brian Chezum

    () (Department of Economics, St. Lawrence University)


Several studies (Genesove 1993; Chezum and Wimmer 1997) use evidence of a correlation between seller characteristics and prices as evidence of adverse selection. This approach ignores the effect seller effort might have on the quality of goods sold. We develop a theoretical framework that accounts for both adverse selection and seller effort and provide a set of conditions under which sellers, who more likely adversely select the goods they sell, produce higher quality goods. Empirically, adverse selection emerges as a special case of selection bias. To disentangle the effects of adverse selection from seller effort, we employ a unique data set that allows us to model the selection decision explicitly. The evidence suggests that both adverse selection and hidden effort play important roles in the market for thoroughbred racehorse prospects.

Suggested Citation

  • Bradley S. Wimmer & Brian Chezum, 2006. "Adverse Selection, Seller Effort, and Selection Bias," Southern Economic Journal, Southern Economic Association, vol. 73(1), pages 201-218, July.
  • Handle: RePEc:sej:ancoec:v:73:1:y:2006:p:201-218

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    References listed on IDEAS

    1. Hurley, Terrance M. & Otto, Daniel & Holtkamp, Janice, 1999. "Valuation of Water Quality in Livestock Regions: An Application to Rural Watersheds in Iowa," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 31(01), pages 177-184, April.
    2. Smith, Richard J & Blundell, Richard W, 1986. "An Exogeneity Test for a Simultaneous Equation Tobit Model with an Application to Labor Supply," Econometrica, Econometric Society, vol. 54(3), pages 679-685, May.
    3. Blomquist, Glenn C. & Whitehead, John C., 1998. "Resource quality information and validity of willingness to pay in contingent valuation," Resource and Energy Economics, Elsevier, vol. 20(2), pages 179-196, June.
    4. Mi-Jung Um & Seung-Jun Kwak & Tai-Yoo Kim, 2002. "Estimating Willingness to Pay for Improved Drinking Water Quality Using Averting Behavior Method with Perception Measure," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 21(3), pages 285-300, March.
    5. Seung-Hoon Yoo & Hee-Jong Yang, 2001. "Application of Sample Selection Model to Double-Bounded Dichotomous Choice Contingent Valuation Studies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 20(2), pages 147-163, October.
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    7. Hoehn, John P. & Randall, Alan, 1987. "A satisfactory benefit cost indicator from contingent valuation," Journal of Environmental Economics and Management, Elsevier, vol. 14(3), pages 226-247, September.
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    9. Clifford, William B. & Hoban, Thomas J. & Whitehead, John C., 2001. "Willingness To Pay For Agricultural Research And Extension Programs," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 33(01), April.
    10. John C. Whitehead & Timothy C. Haab & Ju-Chin Huang, 1998. "Part-Whole Bias in Contingent Valuation: Will Scope Effects Be Detected with Inexpensive Survey Methods?," Southern Economic Journal, Southern Economic Association, vol. 65(1), pages 160-168, July.
    11. Viscusi, W Kip, 1989. "Prospective Reference Theory: Toward an Explanation of the Paradoxes," Journal of Risk and Uncertainty, Springer, vol. 2(3), pages 235-263, September.
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    More about this item

    JEL classification:

    • L15 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Information and Product Quality
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design


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