Adverse Selection and Long-Term Care
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Adverse selection occurs in situations where market participation is impacted by asymmetric information, when one party has more information than the other. It is most common in health economics when analyzing insurance markets, like Medigap, and long-term care. Here, adverse selection is when the buyer has more information about their health risks and risk preferences than the seller.
As indicated by the definition, adverse selection in an insurance market (see “Health Insurance”) occurs when the buyer has health risks and risk preferences that are unknown to the seller. Generally, the individual’s health risks and risk preferences are high, and he purchases insurance knowing the seller in uninformed. An example of adverse selection is when an individual works at a high-risk job, like logging, and purchases health insurance knowing they have a higher probability of being injured. Here the individual has more knowledge about their risk preferences than the...
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