Browsing by Author "Julius, Niklaus"

Adverse selection is a core part of our understanding of market failure, and that understanding has changed significantly since Akerlofs seminal paper. The impact of adverse selection on a market represents a large loss of efficiency, and thus there are two questions economists should seek to answer - the question of empirical existence, and the question of rectification. I review some theoretical models of adverse selection, which suggest certain kinds of intervention to recover market surplus lost due to adverse selection issues. I also review empirical literature to do with the existence of adverse selection in practice, and a randomized experiment which confirms the existence of adverse selection and the viability of a potential intervention. I find that the empirical evidence, while not unanimous, suggests that adverse selection is a real problem that causes lost market surplus in a number of markets, including a broad spectrum of insurance markets and some financial markets. I find that there is little reason to believe a single kind of intervention will work - rather, I conclude that interventions should be tailored to specific instances of adverse selection, making use of the empirical and theoretical research directed at similarly specific markets or models. More research is needed to improve the empirical methodology and to further refine theoretical models of adverse selection before the economics profession can produce reliable policy advice for dealing with adverse selection.