Question

I, SG, professor of economics, promise that no one will fail this course. (Don't believe this, this is just an supposition for this assignment) Of course, from experience I know that had I said this, the students will stop studying and turn in completed homework assignments. Why is this not a good educational choice? Is this an example of adverse selection problem?

Answer 1

This is an incentive problem. Once students get to know that they are not going to fail, even if they don't study at all, they will not have any incentive to study. Someone who doesn't like studying will not study, and those who are keener to learn and study will be the only ones who'll study. However, since no one is going to fail, it will affect the learning environment because those who does not have proper understanding of the subject will also get promoted. So this negatively affect those who actually want to study - by reducing incentive and degrading the learning environment. So not a good educational choice.

Adeverse selection describes a situation where a selection is made in the presence of asymmetric information. This is an adverse selection problem in the sense that since professor is not failing anyone (might not be giving exam), he does not know who actually has knowledge about the subject and who does not. He will "adversely select" every student worthy of not failing.