Adverse Selection, Gresham's Law and State Regulation

14 Pages Posted: 7 Feb 2015

Date Written: February 2015

Abstract

Regulation is often justified as a response to adverse selection caused by poorly informed buyers and as a means of preventing a ‘race to the bottom’ in competitive markets. This paper argues that competitive markets respond with a variety of institutional mechanisms to problems of adverse selection and that these are often subverted by regulation. Far from Gresham's Law being associated with competitive market processes, it is actually more correctly viewed as the outcome of regulatory intervention that weakens the quality‐protecting incentives that economic agents would otherwise face.

Keywords: adverse selection, educational certification, Gresham's Law, public choice, quality standards, regulation

JEL Classification: B53, D70

Suggested Citation

Ricketts, Martin, Adverse Selection, Gresham's Law and State Regulation (February 2015). Economic Affairs, Vol. 35, Issue 1, pp. 109-122, 2015, Available at SSRN: https://ssrn.com/abstract=2561651 or http://dx.doi.org/10.1111/ecaf.12108

Martin Ricketts (Contact Author)

University of Buckingham ( email )

Hunter Street
Buckingham MK18 1EG
United Kingdom

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