LINK IT UP

Visit this website (http://openstax.org/l/healtheconomics) to read about the relationship between health care

and behavioral economics.

The Adverse Selection Problem

Adverse selection refers to the problem in which insurance buyers have more information about whether they

are high-risk or low-risk than the insurance company does. This creates an asymmetric information problem

for the insurance company because buyers who are high-risk tend to want to buy more insurance, without

letting the insurance company know about their higher risk. For example, someone purchasing health
398 16 • Information, Risk, and Insurance

insurance or life insurance probably knows more about their family’s health history than an insurer can

reasonably find out even with a costly investigation. Someone purchasing car insurance may know that they

are a high-risk driver who has not yet had a major accident—but it is hard for the insurance company to collect
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