Economics Dictionary of Arguments

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Adverse selection: Adverse selection refers to the phenomenon in which asymmetric information in insurance or trading markets leads to a preference for poorer or riskier products or individuals.
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Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments.

 
Author Concept Summary/Quotes Sources

Nicholas Barr on Adverse Selection - Dictionary of Arguments

Gaus I 213
Adverse Selection/public goods/welfare state//Barr/Moon: [in a welfare state] voluntary welfare provision may (...) be unable to cover everyone in a society. Many people in the heyday of mutual aid societies were not members, and non-members were often among the least advantaged, those without steady jobs and a secure place within the community.
>Welfare state
, >Society.
Adverse selection: organizations offering protection recognize that those most likely to need protection have
Gaus I 213
the greatest incentive to seek it, and so to join a mutual aid society or to purchase insurance, while those facing the lowest risks have an incentive to stay out. As a result of this process of 'adverse selection' , risks tend to be spread over a smaller and smaller part of the population, and premiums must rise accordingly. This process of adverse selection can continue to the point where most of those in need of protection are unable to afford it, because premiums have to rise so high that all but the most vulnerable drop out. The welfare state can combat the problem of adverse selection by making membership compulsory: 'because low risks cannot opt out, it makes possible a pooling solution' (Barr, 1992(1): 755).
>Insurances.
Moral hazard: adverse selection is reinforced by a second process or condition, called 'moral hazard'. People who are insured against a certain risk may be more willing to take chances than they would be in the absence of insurance. Knowing that if I get sick or injured, my medical bills will be covered, may make me more willing to engage in risky behaviour, such as downhill skiing. To the extent that this occurs, organizations may face higher claims, thereby forcing them to raise their charges, and discouraging others from purchasing protection. More obviously, unemployment insurance schemes are subject to moral hazard, for knowing that I will be covered in the event that I am unemployed, I have an incentive to quit (or arrange to be fired) and/or not to seek or accept employment. Of course, state schemes are subject to moral hazard as well, but the key point is
that if the genuine risk of losing one's job is to be covered at all, it must be covered through a public programme (see Barr, 1998(2): 190—2).
>Moral Hazard.

1. Barr, Nicholas (1992) 'Economic theory and the welfare state'. Journal of Economic Literature, 30 (2): 741-803.
2. Barr, Nicholas (1998) The Economics of the Welfare State, 3rd edn. Stanford, CA: Stanford University Press.

Moon, J. Donald 2004. „The Political Theory of the Welfare State“. In: Gaus, Gerald F. & Kukathas, Chandran 2004. Handbook of Political Theory. SAGE Publications

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Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments
The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition.
Barr, Nicholas
Gaus I
Gerald F. Gaus
Chandran Kukathas
Handbook of Political Theory London 2004


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