I don’t think any of these examples are examples of adverse selection because they generate separating equilibria prior to the transaction without any types dropping out of the market, so there’s no social inefficiency.
Insurance markets are difficult (in the standard adverse selection telling) because insurers aren’t able to tell which customers are high risk vs low risk, and so offer prices for the average of the two, leading to the low-risk types dropping out because the price is more than they’re willing to pay. I think this formal explanation is good https://www.kellogg.northwestern.edu/faculty/georgiadis/Teaching/Ec515_Module14.pdf
I think this post makes an important point, that it’s important to take conditional expectations, where one is conditioned on being able to make a trade, but none of this is adverse selection, which is a specific type of dynamic Bayesian game that leads to socially inefficient outcomes which isn’t a property of dynamic bayesian games in general.
I don’t think any of these examples are examples of adverse selection because they generate separating equilibria prior to the transaction without any types dropping out of the market, so there’s no social inefficiency.
Insurance markets are difficult (in the standard adverse selection telling) because insurers aren’t able to tell which customers are high risk vs low risk, and so offer prices for the average of the two, leading to the low-risk types dropping out because the price is more than they’re willing to pay. I think this formal explanation is good https://www.kellogg.northwestern.edu/faculty/georgiadis/Teaching/Ec515_Module14.pdf
I think this post makes an important point, that it’s important to take conditional expectations, where one is conditioned on being able to make a trade, but none of this is adverse selection, which is a specific type of dynamic Bayesian game that leads to socially inefficient outcomes which isn’t a property of dynamic bayesian games in general.