Question

• Which of the following is a screen against adverse selection?

• Insurance companies require homeowners to have smoke detectors

• Rearview cameras in cars.

• Installing engine monitors to track driving habits of the insured.

• Prospective secretaries must take a typing test before being hired.

Answer 1

Option D.

Adverse selection usually occurs due to difference in the information available to two parties involved in a transaction.

This can lead to a well informed party taking advantage of the party with less information.

Screening is a process to prevent adverse selection problem and is undertaken by a party with less information.

In the above scenario, prospective secretaries taking a typing test before being hired is considered as a screen against adverse selection as it helps them in rectifying their asymmetry.