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Adverse Selection, G resham's L aw and State Regulation
Author(s) -
Ricketts Martin
Publication year - 2015
Publication title -
economic affairs
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.24
H-Index - 18
eISSN - 1468-0270
pISSN - 0265-0665
DOI - 10.1111/ecaf.12108
Subject(s) - adverse selection , race to the bottom , incentive , variety (cybernetics) , intervention (counseling) , selection (genetic algorithm) , race (biology) , quality (philosophy) , state (computer science) , outcome (game theory) , public economics , face (sociological concept) , economics , competition (biology) , business , law and economics , market economy , microeconomics , medicine , biology , sociology , ecology , social science , philosophy , epistemology , algorithm , artificial intelligence , psychiatry , computer science , botany
Regulation is often justified as a response to adverse selection caused by poorly informed buyers and as a means of preventing a ‘race to the bottom’ in competitive markets. This paper argues that competitive markets respond with a variety of institutional mechanisms to problems of adverse selection and that these are often subverted by regulation. Far from G resham's L aw being associated with competitive market processes, it is actually more correctly viewed as the outcome of regulatory intervention that weakens the quality‐protecting incentives that economic agents would otherwise face.