Unfavourable selection

The unfavourable selection or antisélection is a statistical phenomenon and economic which plays a big role in the fields of the Assurance and the Risk management, by which quoted on a market leads to opposite results of those desired, because of asymmetries of information. It is a form of the Problème main thing-agent.

It appears by the difficulty for the customer of apprehending:

and the experiment qualification level of the suppliers;
adequacy of the product or competences of the supplier to his needs;
contents and the effective quality of the product or the service.

Incomplete contract and unfavourable selection

The incomplete contracts comprise asymmetries of information, i.e. there is an unequal distribution of information between the two actors. These asymmetries of information make possible of the opportunist behaviors:

the individuals always do not say what they know
the individuals do not hold inevitably their promises

There are two principal types of opportunist behaviors:

post-contractual opportunism
pre-contractual opportunism

The principal problem of the pre-contractual opportunist behavior is the unfavourable selection which appears with each time an actor has information that the other does not have with the signature of the contract.

To fight against the unfavourable selection

the signal: action emitted by that which can some in order to transmit credible information more
the filter
the reputation: action emanating from that which can some less in order to force that which knows some more has to reveal the truth

The anti-selection is the resultant of imperfect information. One of the two parts contracting does not have the possibility of knowing all the characteristics of the product, which sometimes leads it to select products of bad quality. The unfavourable selection or antisélection appears by the difficulty for the customer of apprehending:

and the experiment qualification level of the suppliers
adequacy of the product or competences of the supplier to his needs
contents and quality for the product or the service

“It is acted in fact of the generalized distrust which is born since there does not exist a catalogs known of all and specifying the characteristics from all the goods exchanged or likely to be it. Knowledge on the “quality” of the goods is then asymmetrically distributed. ” (Brousseau, 1993).

In such a situation, low produce them at the price (and thus, probably, worst) are likely to eliminate all the others. The canonical example is that of Akerlof (“Nobel Prize” of economy in 2001) in its market off lemons (gone of the wrecks). It shows that in situation of imperfect information, the unfavourable risk of selection (or anti-selection) will lead so that the market of the second-hand cars proposes only wrecks. Indeed, the average costs will be the resultant of the average of the prices of good and bad occasions. As the consumer is in situation of imperfect information (he does not recognize good bad cars), it will be ready to pay only the average costs, to minimize its risks. However, if the salesmen of bad occasions will be able only to be delighted, the salesmen of good occasions, not having a hope to sell, will leave this market: only will remain the salesmen of wrecks.

Bibliographical reference

G. AKERLOF, The market for let us lemons: quality uncertainty and the market mechanism, in Quarterly Newspaper off Economics , 1970, n° 84, pp. 488-500.

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