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Monday, December 19, 2005

Adverse Selection -- Not Market Failure?

Alex Tabarrok:
"One reason adverse selection may not be that important in practice is because buyers and sellers use testing and certification to remove the most important information asymmetries. You can buy a decent used car, for example just get it inspected or certified. Only if such adjustments are illegal, or in some other way not allowed, will adverse selection become important."
The author suggests other reasons as well. Perhaps the best way to put the point is: there seems to be many ways the market responds to concerns about adverse selection. If the market responds, why would we think the market fails in the face of adverse selection?

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