Adverse Selection_China Economic Network - National Economic Portal

adverse choice

16:32, July 20, 2011 Source: China Economic Network

"Adverse selection" is a word with rich meanings in economics. One definition of "adverse selection" refers to the phenomenon that the inferior products produced by the asymmetric information between trading parties and the decline of market price drive out the high-quality products, and then the average quality of the market traded products declines.

In real economic life, there are some phenomena that are inconsistent with the routine. Normally, if the price of a commodity is lowered, the demand for the commodity will increase; If the price of a commodity is raised, the supply of that commodity will increase. However, due to the incompleteness of information and opportunistic behavior, sometimes, when the price of goods is lowered, consumers will not make the choice to increase their purchase and raise the price, and producers will not increase their supply. Therefore, it is called "adverse selection".

Why is adverse selection ubiquitous?

First of all, the "complete information hypothesis" as a basic assumption of mainstream microeconomics is untenable. This assertion does not mean that the word "complete" is too idealistic, but that this assumption is not a scientific simplification at all. On the premise of the choice of private system, all valuable things tend to be privatized. Therefore, as a factor of production and a very important factor of production, information is also an object of privatization. Therefore, "complete information" fundamentally denies that information is a factor of production, and also fundamentally conflicts with the institutional premise of privatization.

One of the thinking mistakes in the study of adverse selection is that the neutral 2+2 thinking mode is not used, but the choice is limited to consumers' choice of insurance products. From the point of view of 2+2, any exchange is two selectors+two kinds of goods. The choice is two-way. Both parties are conducting value research and selection on each other's goods. Due to the reality of information asymmetry, the choice of both sides is so-called reverse, not limited to the party holding monetary goods. Buying and selling are mutual. We can only see the adverse selection of the buyer holding the currency, but not the adverse selection of the seller. We have to say that we are influenced by the narrow 1+1 thinking mode.

Therefore, from the perspective of 2+2, the so-called reverse is just the reverse exchange of the direction of the other party. For the selectors themselves, the principle of seeking advantages and avoiding disadvantages and the characteristics of rational people have never been violated. As adverse selection is actually a very normal choice, it is not worth writing about by economists.

Secondly, the "complete information hypothesis" contains wrong objective axiological thinking. The reason why exchange can occur is that the subjectivity of value causes the difference in value cognition. If both parties' value cognition of the same thing is completely objective, then it is the same, and there is no motivation for exchange. Rational people are people who seek benefits and avoid disadvantages. Equivalence exchange means that there will be no benefits in exchange.

(Editor in charge: s)