Adverse Selection Definition

noun

The tendency of sellers to substitute low-quality products for high-quality products or of a uniformly priced service, such as insurance, to attract only the least profitable customers. Adverse selection arises from the inability of buyers to differentiate between high-quality and low-quality products or of sellers to differentiate between profitable and unprofitable customers.

American Heritage

(economics, business, insurance) The process by which the price and quantity of goods or services in a given market is altered due to one party having information that the other party cannot have at reasonable cost.

It is adverse selection that leads US workers who anticipate high family medical expenditure to seek employers with superior health insurance coverage for their employees.

The large number of "lemons" in the used-car market is the result of adverse selection.

Wiktionary