Introduction

In a nutshell, adverse selection refers to the choices that consumers make when they are at an information disadvantage. Adverse selection theory was put forward by Professor George A. Akerlof, one of the Nobel Prize winners in economics in 2001. It mainly studies the influence of asymmetry of product quality information on market efficiency. Because this theory is based on the ‘lemon’ problem, it is also called ‘lemon market’ theory. Through his ‘lemon market’ model (also called Akerlof model), Akerlof proved the consequence of information asymmetry: adverse selection caused by ‘lemon’ problem reduces the efficiency of market transactions. Take the used car market as an example. The seller knows the true quality of the car, but the buyer doesn’t know it, only knows the average quality of the car, so he is only willing to pay the price according to the average quality.