The term negative selection or English Adverse Selection, also Gegenauslese or eingedeutscht Adverse selection, designation in the new institution economics a condition, in which it comes on a market systematically to unwanted results. The first fundamental model for this developed by Akerlof (1970), which showed by the example of the used car market, like it for the displacement of the desired offerers comes (so-called sour cucumber problem, English Lemons problem). Akerlof was distinguished 2001 together with Michael Spence and Joseph E. Stiglitz with the Nobelpreis for economic science for the study of the term.

Information asymmetry

A condition for it that it comes too adverse selection, is an information asymmetry between the contracting parties. By the example of the used car market this asymmetry consists of the fact that the salesman of the car knows the quality, which buyer cannot judge her (or at least not free of charge), in the Lemons example means this following:

In a market, in which both good ("“Plums"”) and bad used cars ("“Lemons"”) are offered, the buyers must form for example an expectancy value for the quality. This lies between the value of a good and that of a bad car; they are ready thereby only a lower price to pay, than they would pay for a good car. Thus systematically the offerers of good used cars from the market are pushed, so that at the end only bad used cars were offered. (See Akerlof, G.A.: The Market for "“Lemons"”, in: Quarterly journal OF Economics, volume. 89 (1970), P. 488-500)

Solution types

In order to prevent that it comes due to this information asymmetry to a suboptimalen Handelsvolumen, it is available different measures:

• Signaling: Here the informed market participants try (in the Lemons example: The used car salesmen) to diminish information asymmetry. Here the offerers of good cars have an interest to distinguish itself convincingly from the offerers of bad cars. They take to produce a signal for example a Gebrauchtwagensiegel etc. to costs on itself.
• Screening: Here the uninformed market side (thus here the buyers) takes to costs on itself, in order to diminish information asymmetry. Examples would be here: to carry forward a Kfz mechanic to the purchase, an extensive test run, the "“Durchchecken"” in a workshop.
• Self Selection: Here suitable contract menus are offered, so that the good offerers and the bad offerers select different contracts in each case. For example the good offerers could offer economically a guarantee, while this became too expensive the bad offerers, so that each salesman, who would be ready, would be automatic a guarantee to offer a good offerer.

However it always comes with these "“solution types"” to costs, so that the reached result corresponds not to the general market equilibrium and is thus wohlfahrtssuboptimal.

(see also the general description: Information asymmetry.)

The moreover one information asymmetry between offerers and Nachfragern can be reduced by the employment by intermediate one (commercial intermediary). Under use of scale effects the intermediate takes over thereby the costs of the Signaling and Screening. For example the intermediate can distribute the costs of the provision of information on a very large number of Nachfragern. Since the Nachfrager can obtain substantial cost savings by the use of the Intermediationsleistung, they are ready to remunerate the intermediate with a commission.

Examples

Insurance markets

In the insurance market an information asymmetry between insurance exists and insured. The insurers avail themselves of the available means in order to limit this information asymmetry. For example insurance contracts plan detailed obligations to information, it different contract menus (self participations etc.) offered etc.

Example:

Note: In the following first from risk-neutral Prinzipalen and agents one proceeds. That is uncommon, is however simpler to show and changes nothing in the fundamental statements of the model.

An insurer V would like to offer a health insurance. As customers two people types (equal in size) A and B are applicable. While the group A lives very health-consciously and counts in the expectancy value on 50 "€ health costs per year, humans of the group of B strong smokers are over weighty and. This group counts per year on 150 "€ health costs.

If the insurer A cannot differentiate priori between the two groups, it would form the expectancy value (plus a markup neglected here) and would offer the insurance for this price (here 100 "€). For 100 "€ however the health-conscious are not ready to lock a health insurance. They "“insure"” therefore and bear themselves possibly resulting cost to themselves. Since thus only humans of the group of B lock the insurance, this tariff is no longer eligible for financing, the insurer must the price to at least 150 "€ increase.

This situation is however unfavorable for humans of the group of A. Even if they would lock gladly an insurance, they cannot do this (or only too much high costs). Also the insurer would have an interest to offer humans of the group of A a contract. For this reason there are a great many different tariffs with private health insurances, for example with different self participations

Tax competition

If several states with different control systems stand with one another in the competition, it can likewise come to adverse selection effects.

Example:

State of A has a head restraint of you system, where each citizen must pay overall 100 "€ taxes. State of B has a progressive income tax, where the poorest ones do not have to pay anything, the richest ones however 200 "€. Before the borders between the states are opened, both households are in the equilibrium.

By political events it comes to a border opening between the states, so that the citizens of both States of their residence may look for each other freely. Tendentious all citizens, who pay than 100 "€ taxes under the tax regime of the State of B more, will pull into the State of A and all citizens, who would have in State of A so far 100 "€ to have paid and in State of B less pay, will become in State of B to pull. This leads to the fact that State of B cannot maintain its control system, because all, which paid so far more than 100 "€, emigrated and it obtains no longer sufficiently incomes.

(See to these and other effects, e.g. on collection of a real estate tax: Oates, W.E., Fiscal Federalism, 1972.)

Welfare states

Similar arguments apply to the financing of social safeguards:

These measures must be paid by the more efficient part of the respective population, who has even however no direct interest in the made available achievements. Now if several states are with one another in the competition, then it can come between these states to an undercutting race:

• A high level at social achievements attracts the subscribers of these achievements,
• The cost of this level must be borne by the ready plates (= net payers) of these achievements. These costs affect this group however deterring.

Thus a state attracts systematically the subscribers of social security benefits, displaces however the part of the population, to who these achievements pay could.

Hans Werner sense of the institute for economic research calls this process "“selection principle"”. If thus states stand with one another in the system competition, they are not in the long term at all able to maintain umverteilende social systems. Frequently the State of New York is called thereby as example: New York had to again abolish imported high social security benefits after systematic immigration of arms from other Federal States of the USA, in order the bankruptcy to escape (S. literature data). With this pressure released by migration movements it is also explained why there is no social security system comparable with Germany or other European states in the America more developed in this regard: Even if would wish individual states or the entire nation this, the undercutting race of the other states leads to the fact that the supply of these achievements is not possible.

On the occasion of the European Union extension to the East 2004 this danger also in this country was again discussed. However certain liberties are still reduced in the entry countries for a time.

Literature

• Akerlof, G.A.: The Market for "“Lemons"”, in: Quarterly journal OF Economics, volume. 89 (1970), P. 488-500
• Social union, migration and the European condition, Hans Werner sense, 06/2004
• Oates, Wallace E.: Fiscal Federalism, New York and others: Harcourt Brace Jovanovich, 1972

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