Question

Which of these worsens adverse selection due to buyers having private information?

a. freedom of choice of buyers to buy or not buy whenever they want to
b. constraints on buyers' ability to buy or not buy whenever they want to
c. constraints on sellers' ability to change price
d. flexibility of sellers to lower price but not raise price

Answer 1

Option b, constraints on buyers' ability to buy or not buy whenever they want to, worsens adverse selection due to buyers having private information.

Step-by-step explanation:

Adverse selection refers to the problem in which buyers have private information that sellers are not aware of, leading to an imbalance of information in the market. This can lead to worsened adverse selection. Let's look at each option:

1. a. Freedom of choice of buyers to buy or not buy whenever they want to: This option does not worsen adverse selection as it does not involve any constraint on buyers or sellers.
2. b. Constraints on buyers' ability to buy or not buy whenever they want to: This option worsens adverse selection because it limits the freedom of buyers to make independent decisions based on their private information.
3. c. Constraints on sellers' ability to change price: This option does not directly worsen adverse selection as it only affects the sellers' ability to change prices, not the buyers' private information.
4. d. Flexibility of sellers to lower price but not raise price: This option does not worsen adverse selection as it only affects the sellers' pricing strategy and does not directly relate to buyers' private information.

Based on this analysis, option b, constraints on buyers' ability to buy or not buy whenever they want to, worsens adverse selection due to buyers having private information.