Adverse Selection

Adverse Selection https://store.theartofservice.com/the-adverse-selection-toolkit.html

Corporate governance Mechanisms and controls • Corporate governance mechanisms and controls are designed to reduce the inefficiencies that arise from moral hazard and adverse selection https://store.theartofservice.com/the-adverse-selection-toolkit.html

Agency cost Agency costs in corporate governance • Information asymmetry contributes to moral hazard and adverse selection problems. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Market failure - The Nature of the Exchange • Examples of this problem are adverse selection and moral hazard https://store.theartofservice.com/the-adverse-selection-toolkit.html

Economics • Related problems in insurance are adverse selection, such that those at most risk are most likely to insure (say reckless drivers), and moral hazard, such that insurance results in riskier behavior (say more reckless driving). https://store.theartofservice.com/the-adverse-selection-toolkit.html

Economics • Moreover, attempting to reduce one problem, say adverse selection by mandating insurance, may add to another, say moral hazard https://store.theartofservice.com/the-adverse-selection-toolkit.html

Peer-to-peer lending - United States • Early peer-to-peer platforms had few restrictions on borrower eligibility, which resulted in adverse selection problems and high borrower default rates https://store.theartofservice.com/the-adverse-selection-toolkit.html

Divorce insurance - How policies work • To protect against adverse selection, Divorce Insurance policies have a lengthy ‘elimination period’ or a waiting period before a claim can be filed. Currently the waiting period for the standard plan offered by the company that provides Divorce Insurance is 48months. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Group Insurance • In other words, people belong to the group not because they possess some high-risk factor which makes them more apt to purchase insurance (thus increasing adverse selection); instead they are in the group for reasons unrelated to insurance, such as all working for a particular employer. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Group Insurance • Since compulsory covers offer no scope for adverse selection they come with far relaxed underwriting requirements than voluntary covers, Underwriting requirements even for Voluntary Group Life Covers are far lower than the respective requirements for individual lives. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Medical Underwriting - Purpose • This tendency is called adverse selection, i.e., a system which attracts high utilization users while discouraging low utilizers from participating https://store.theartofservice.com/the-adverse-selection-toolkit.html

Health insurance - Australia • They are also free not to impose them to begin with, but this would place such a fund at risk of adverse selection, attracting a disproportionate number of members from other funds, or from the pool of intending members who might otherwise have joined other funds https://store.theartofservice.com/the-adverse-selection-toolkit.html

Health insurance - Netherlands • This new system avoids the two pitfalls of adverse selection and moral hazard associated with traditional forms of health insurance by using a combination of regulation and an insurance equalization pool https://store.theartofservice.com/the-adverse-selection-toolkit.html

Health insurance - Netherlands • Funding from the equalization pool is distributed to insurance companies for each person they insure under the required policy. However, high-risk individuals get more from the pool, and low-income persons and children under 18 have their insurance paid for entirely. Because of this, insurance companies no longer find insuring high risk individuals an unappealing proposition, avoiding the potential problem of adverse selection. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Flood insurance - In the United States • Most private insurers do not insure against the peril of flood due to the prevalence of adverse selection, which is the purchase of insurance by persons most affected by the specific peril of flood https://store.theartofservice.com/the-adverse-selection-toolkit.html

Flood insurance - In the United States • However, the program has never worked as insurance, because of adverse selection https://store.theartofservice.com/the-adverse-selection-toolkit.html

Health economics - Health care markets • Features of insurance market risk pools, such as group purchases, preferential selection (cherry-picking), and preexisting condition exclusions are meant to cope with adverse selection. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Health economics - Health care markets • The U.S. health care market has relied extensively on competition to control costs and improve quality. Critics question whether problems with adverse selection, moral hazard, information asymmetries, demand inducement, and practice variations can be addressed by private markets. Competition has fostered reductions in prices, but consolidation by providers and, to a lesser extent, insurers, has tempered this effect. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Index of economics articles - A • * Accountancy – Accounting reform – Actuary – Adaptive expectations – Adverse selection – Agent (economics) – Agent-based computational economics – Aggregate demand – Aggregate supply – Agricultural policy – Appropriate technology – Arbitrage – Arrow's impossibility theorem – Auction – Austrian School – Autarky https://store.theartofservice.com/the-adverse-selection-toolkit.html

Market microstructure - Transaction cost and timing cost • This factor focuses on transaction cost and timing cost and the impact of transaction cost on investment returns and execution methods. Transaction costs include order processing costs, adverse selection costs, inventory holding costs, and monopoly power. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Microeconomics - Externalities and market failure • One application of this result is to the already mentioned Market for Lemons, which deals with adverse selection: households buy from a pool of goods with heterogeneous quality considering only average quality (business)|quality, since in general the equilibrium is not efficient, any tax that raises average quality is beneficial (in the sense of optimal taxation) https://store.theartofservice.com/the-adverse-selection-toolkit.html

Equity premium puzzle - Market failure explanations • Two broad classes of market failure have been considered as explanations of the equity premium. First, problems of adverse selection and moral hazard may result in the absence of markets in which individuals can insure themselves against systematic risk in labor income and noncorporate profits. Second, transaction costs or liquidity constraints may prevent individuals from consumption smoothing|smoothing consumption over time. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Information economics • adverse selection, The New Palgrave Dictionary of Economics, 2nd Edition https://store.theartofservice.com/the-adverse-selection-toolkit.html

Information economics - Information asymmetry • Information asymmetry means that the parties in the interaction have different information, e.g. one party has more or better information than the other. Expecting the other side to have better information can lead to a change in behavior. The less informed party may try to prevent the other from taking advantage of him. This change in behavior may cause inefficiency. Examples of this problem are adverse selection and moral hazard. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Information economics - Information asymmetry • A classic paper on adverse selection is George Akerlof's The Market for Lemons.George Akerlof, 1970. The Market for 'Lemons': Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, 84(3), pp. [http://163.117.2.172/microii-phd/G%20Akerlof.pdf 488–500]. There are two primary solutions to this problem, signalling and screening. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Labour economics - Information approaches • Another aspect of uncertainty results from the firm's imperfect knowledge about worker ability. If a firm is unsure about a worker's ability, it pays a wage assuming that the worker's ability is the average of similar workers. This wage undercompenstates high ability workers and may drive them away from the labour market. Such phenomenon is called adverse selection and can sometimes lead to market collapse. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Labour economics - Information approaches • There are many ways to overcome adverse selection in labour market. One important mechanism is called Signalling (economics)|signalling, pioneered by Michael Spence. In his classical paper on job signalling, Spence showed that even if formal education does not increase productivity, high ability workers may still acquire it just to signal their abilities. Employers can then use education as a signal to infer worker ability and pay higher wages to better educated workers. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Affordable Care Act - Healthcare debate, 2008–10 • With universal health care|universal healthcare as one of the stated goals of the Obama administration, congressional Democrats and health policy experts like Jonathan Gruber (economist)|Jonathan Gruber and David Cutler argued that guaranteed issue would require both community rating and an individual mandate to ensure that adverse selection and/or Free rider problem|free riding would not result in an Death spiral (insurance)|insurance death spiral; they convinced Obama that this was necessary, and persuaded him to accept congressional proposals that included a mandate https://store.theartofservice.com/the-adverse-selection-toolkit.html

Affordable Care Act - Insurance exchanges and the individual mandate • And price regulations will be implemented, including a minimum Loss ratio|medical loss ratio, and partial community rating that prevents medical underwriting|price discrimination from wikt:price out of the market|pricing individuals out of the market through unaffordable plans or premium increases on the insured—adverse selection|namely poor and sick individuals who are more expensive to cover for insurers motivated either by profit motive|profit maximization and/or the economics of insurance; specifically, the risk of an insurance pool Death spiral (insurance)|not providing enough net-premiums to offset net-pay-outs. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Affordable Care Act - Insurance exchanges and the individual mandate • Alternatively, the process could settle at a stable equilibrium relying on relatively adverse selection|high premiums for the insured and less coverage (and thus more illness and medical bankruptcy) for the uninsured https://store.theartofservice.com/the-adverse-selection-toolkit.html

Unemployment benefits - Economic rationale and issues • The fact that a compulsory government program and not the private market provides unemployment insurance can be explained using the concepts of adverse selection and moral hazard. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Unemployment benefits - Adverse selection • “A compulsory government program avoids the adverse selection problem https://store.theartofservice.com/the-adverse-selection-toolkit.html

Moral hazard - Insurance industry • Economists distinguish moral hazard from adverse selection, another problem that arises in the insurance industry, which is caused by hidden information rather than by hidden actions. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Student loan - Income-Based Repayment • Scholars have criticized IBR plans on the grounds that they create moral hazard and suffer from adverse selection https://store.theartofservice.com/the-adverse-selection-toolkit.html

Mortgage-backed security - Credit risk • If the MBS was not underwritten by the original real estate and the issuer's guarantee, the rating of the bonds would be much lower. Part of the reason is the expected adverse selection against borrowers with improving credit (from MBSs pooled by initial credit quality) who would have an incentive to refinance (ultimately joining an MBS pool with a higher credit rating). https://store.theartofservice.com/the-adverse-selection-toolkit.html

Information asymmetries • adverse selection, The New Palgrave Dictionary of Economics 2nd Edition https://store.theartofservice.com/the-adverse-selection-toolkit.html

Information asymmetries - Information asymmetry models • An example of adverse selection is when people who are high risk are more likely to buy insurance, because the insurance company cannot effectively discriminate against them, usually due to lack of information about the particular individual's risk but also sometimes by force of law or other constraints https://store.theartofservice.com/the-adverse-selection-toolkit.html

Information asymmetries - Adverse selection • The classic paper on adverse selection is George Akerlof's The Market for Lemons from 1970, which brought informational issues at the forefront of economic theory https://store.theartofservice.com/the-adverse-selection-toolkit.html

Savings and loan crisis - Failures • A Federal Reserve Bank panel stated the resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse selection incentives that compounded the system’s losses. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Volatility (finance) - Volatility and liquidity • When market makers infer the possibility of adverse selection, they adjust their trading ranges, which in turn increases the band of price oscillation.Glosten, L https://store.theartofservice.com/the-adverse-selection-toolkit.html

New institutional economics - Overview • [http://www.dictionaryofeconomics.com/article?id=pde2008_T000239edition=currentq=transaction%20coststopicid=result_number=1 Abstract.] credible commitments, modes of governance, persuasive abilities, social norms, ideology|ideological values, decisive perceptions, gained control, enforcement mechanism, asset specificity, human assets, social capital, asymmetric information, strategic behavior, bounded rationality, opportunism, adverse selection, moral hazard, contractual safeguards, surrounding uncertainty, monitoring costs, incentives to collude, hierarchical structures, bargaining strength, etc. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Credit bureau • Such credit information institutions reduce the effect of asymmetric information between borrowers and lenders, and alleviate problems of adverse selection and moral hazard https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection • Two ways to model adverse selection are to employ signaling games and screening games. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection - Insurance • The latter scenario is sometimes referred to as regulatory adverse selection. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection - Insurance • Furthermore, if there is a range of increasing risk categories in the population, the increase in the insurance price because of adverse selection may lead the lowest remaining risks to cancel or not renew their insurance. This promotes a further increase in price, and hence the lowest remaining risks cancel their insurance, leading to a further price increase, and so on. Eventually this adverse selection spiral might, in theory, lead to the collapse of the insurance market. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection - Insurance • To counter the effects of adverse selection, insurers (to the extent that laws permit) ask a range of questions and may request medical or other reports on individuals who apply to buy insurance so that the price quoted can be varied accordingly, and any unreasonably high or unpredictable risks rejected https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection - Insurance • On the other hand, positive test results for adverse selection have been reported in health insurance, long-term care insurance, and annuity markets https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection - Insurance • Another possible reason is the negative correlation between risk aversion (such as the willingness to purchase insurance) and risk level (estimated ex ante based on observation of the ex post occurrence rate of observed claims) in the population: if risk aversion is higher among lower risk customers, such that persons less likely to engage in risk-increasing behavior are more likely to engage in risk-decreasing behavior (to take affirmative steps to reduce risk), adverse selection can be reduced or even reversed, leading to propitious or advantageous selection. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection - Insurance • For example, there is evidence that smokers are more willing to do risky jobs than non-smokers, and this greater willingness to accept risk might reduce insurance purchase by smokers. From a public policy viewpoint, some adverse selection can also be advantageous because it may lead to a higher fraction of total losses for the whole population being covered by insurance than if there were no adverse selection. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse selection - Insurance • In studies of health insurance, an individual mandate that requires people to either purchase plans or face a penalty is cited as a way out of the adverse selection problem by broadening the risk pool. Mandates, like all insurance, increase moral hazard. https://store.theartofservice.com/the-adverse-selection-toolkit.html

Adverse Selection