Adverse Selection

Posted in Human Resource Terms, Total Reads: 3254

Definition: Adverse Selection

Adverse selection refers to the practices leading to unfavourable results owing to differences in the level of information available in the market.

This happens when an employer follows such practices and policies which prove to be discriminatory and leads to selection of applicants with non-desirable traits. The key assumptions in this situation are:

1)There is information asymmetry, i.e., perfect information is not available to the employer

2)There is heterogeneity in the market, i.e., all sort of people are present in the market

Example:  During selection of athletes, not conducting a physical fitness test may lead to selection of athletes who consume drugs, which is non-desirable.

Similarly, a company hiring without background checks may end up hiring candidates with criminal records which maybe undesirable.

Companies need to use background checks and bring such adverse selection activities to their advantage. This would help them match their need to the poll of available candidate and hire the right candidate for the right job.


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