Adverse Selection

Adverse Selection occurs when the more desirable attributes of a market withdraw due to asymmetric information. This could be better quality products, better quality consumers or better quality sellers. The result is that consumer and producers may not make transactions that are socially beneficial, transactions that would yield positive producer and/or consumer surplus.

Adverse selection occurs when the uninformed side of a deal gets exactly the wrong people trading with it (i.e., it gets an adverse selection of the informed parties).

Adverse selection refers to the situation where asymmetric information on the part of one party in an economic transactions leads to desirable good remaining unsold, even though they would be sold in a market with full information.

This is the market failure associated with Asymmetric Information the ability of the more informed agents to exploit their advantage.