Week 4

Question 1

Adverse selection definition

Answer 1

Adverse selection refers to a situation where sellers have information that buyers do not, or vice versa, about some aspect of product quality. In the case of insurance, adverse selection is the tendency of those in dangerous jobs or high-risk lifestyles to get life insurance. To fight adverse selection, insurance companies try to reduce exposure to large claims by limiting coverage or raising premiums.

Question 2

Solutions at the disposal of the players themselves (adverse selcetion)

Answer 2

• For the informed party, signalling his type
• For the uninformed party, design menu of options chosen by different types (called screening)

Question 3

Solutions at the disposal of the state (adverse selection)

Answer 3

• Regulations that forcedisclosure
• Regulations that force transaction
• Subsidies for demand

Question 4

SSNIP Test

Answer 4

Small but Significant Non-transitory Increase in Price. Test typically used by antitrust authorities to define markets