Shape 13
Screening and Adverse Selection
Hidden information before the deal. The uninformed side designs the offer so that different types choose differently.
Adverse selection is the pre-contract problem, distinct from moral hazard which comes after. The characteristic damage is not that buyers get cheated but that the honest supply exits, so the failure is invisible: you never see the transactions that did not happen. It is why insurance requires underwriting, why used goods carry inspections, and why 'no questions asked' offers attract exactly the population you were hoping to avoid.
- How it feels
- One side genuinely cannot verify what the other is claiming.
- Everyone in the market is being priced as if they were average.
- The best participants are quietly leaving rather than arguing.
- An offer with no conditions attached is attracting the wrong applicants.
- Who is playing
- Buyer, seller, and — always forgotten — the good-quality participants who have already exited and are therefore invisible. Judging the market by who is still in it is the standard error.
- Where it lands
- The average quality falls, price falls with it, better participants exit, and in the limit the market disappears despite gains from trade existing throughout.
- What moves it
Offer a menu rather than a price: options that are attractive to one type and unattractive to the other. Certification, inspection, escrow and staged commitment all work by the same mechanism.
Not to be confused with
Nearly every misread in practice is a shape mistaken for its neighbour — and each of those mistakes points you at the wrong fix.
Principal and Agent
Is the hidden thing WHO they are, or WHAT they will do once hired? Type before the deal is adverse selection; behaviour after it is moral hazard.
Costly Signalling
Who acts first? If you design the test, it is screening. If they volunteer the proof, it is signalling.
Where you have already met it
Markets and Money
Used cars, the original case. Also freelance platforms, where cheap bids drive out competent suppliers.
Health and Medicine
Insurance. Voluntary pools attract the people who most expect to claim, which is why mandates and underwriting exist.
Work and Careers
Hiring. Everyone claims the same competence; the interview exists to be a cost only some can bear.
Dating and Attraction
Anonymous introductions. Low-cost approaches attract volume, not quality, for structural rather than moral reasons.