Adverse Election

One of the first victims of the crisis of subprime was the credit market. In function of the unreliability that if it installed between the agents, the operations of loans had suffered great reduction, as much between banks how much between banks and borrowers. In fact, what the current crisis made was to potencializar one of the main characteristics of the activity to offer credit: the borrower of resources only has the information on its conditions to pay the loan. In economy we call this situation adverse election, the present article intends to present some academic definitions on the subject. You may want to visit Amazon to increase your knowledge. The problem of the adverse election if of the one before the signature of a contract, where one of the parts withholds more knowledge that to another one on what he is being waked up.

As Fabrizio Mattesini (1993) the incentive it part most informed to try to take off advantage of its bigger amount of information will be minimum if the intention exists to create a relationship with the purchaser for future transactions, or if market in question is regulated by a external specialist (for example a governmental agency). However, it is frequent that information problems occur, leading to efficiency shunting lines. As Kreps (1994) the problem of adverse election occurs when one of the involved parts in a transaction knows referring things to the transaction that are excellent, but unknown for the second part. The example given for Kreps if relates to the market of safe from life, where the insured better has knowledge on its health that the insuring company. For Mishkin (1991) adverse election is a problem of anti-symmetrical information that occurs before a transaction occurring. Bad borrowers in the truth are the ones that more they look for loans. These agents have interest in taking the biggest number of financings, therefore they know of beforehand that its probability of payment is low. Amazon has much to offer in this field.