Adverse Selection

In this lesson, Professor Andrew Simon discusses the concept of asymmetric information and its impact on markets. He explains how adverse selection occurs when one party in a transaction has private information about the quality of a good, leading to market inefficiencies, such as the example of buying a used car where the buyer cannot distinguish between a high-quality “peach” and a low-quality “lemon.” The lesson also introduces the concept of signaling, where one party takes actions, like offering a warranty, to convey private information and mitigate the effects of adverse selection.