This essay will discuss the relative relationship between adverse selection and asymmetric information. Based on empirical evidence, this essay will critically assess the extent to which there is evidence of adverse selection in markets with asymmetric information. Finally the assignment will discuss and evaluate the implication for several types of market.

             In order to analysis problems and impacts, it is necessary first to define the adverse selection and asymmetric information concept. The concept of adverse selection was first noted by Nobel Laureate George Akerlof in 1970 and explains the situation in which a product or service is often selected by a certain group of people that tends to limit the quality of products/ service exchanged. On the other hand, asymmetric information problem occurs when there is asymmetric knowledge between two parties involved in a transaction. (About.com Online) Katz, Michael and Rosen discussed the adverse selection as being a problem of asymmetric information that takes place before the transaction has been made. It occurs where there is hidden information and people on the informed side of the market take decisions that affect the uninformed side. (Katz, M.L. and Rosen. H.S. 1998).

             Secondly, in order to assess the extent to which there is evidence of adverse selection in markets with asymmetric information, different markets will be analyzed. Will be using empirical analysis to estimate effects and test for adverse selection into different markets.

             A paper by Henry Schneider analyses the adverse selection problem in the used car markets, whether used cars may not be sold to owners which value them the most. His main concern is the potentially inefficiency brought into the used car market due to information asymmetry. Analyzing empirical evidence supported by Hendel and Lizzeri (1999), adverse selection seems to be the second issues in influencing the transaction decisions.