A question on adverse selection for the economists

I can’t think of an example of adverse selection occurring without asymmetric information. Does anyone else know of one?

But as long as I’m here waiting for answers, let me think through an aspect of this…

The classic example of adverse selection in my mind is the Death Spiral. (My dad sells group benefits, so growing up I would hear about some of the weird outcomes of different states’ insurance regulations on things like pre-existing conditions.) Trying to pull apart adverse selection (AS) and asymmetric information (AI) has led me to an interesting thought: The adverse selection problem created by preventing insurance companies from using the (very sensible) policy of not covering pre-existing conditions (i.e. of only insuring insurable things) may unravel some epistemic aspect of this situation.

The private costs of sharing information about pre-existing conditions falls and this might have modest benefits to offset the significant costs of AS. I’m sure health economists would be happy to have this sort of information, and maybe it would give insurance companies’ actuarial division some new insights that could apply to other markets.


One thought on “A question on adverse selection for the economists

  1. Suppose information is indeed symmetric between the parties to a proposed insurance transaction. It could still be the case that one party finds it prohibitively costly to act on the information. But then I suppose you could say the information isn’t truly symmetric if it’s not equally actionable. Information symmetry is a slippery concept.

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