Elyse Melling, Chapter 5, Question 6

I found the recurring topic of adverse selection to be very interesting.  At the beginning of the chapter, Wheelan talked about Clinton's idea of Hope Scholarships. "The plan was designed to address the concern that students graduating with large debts are forced to do well rather than good.... Administrators could determine the average post-graduation salary for eligible students and then calculate the percentage of income they would have to pay in order for the program to recoup its costs." So, for example, a brain surgeon would have to pay back more than a Peace Corps worker. The result of this idea was that the higher the income that people received, the more often they withdrew from the program (They figured that paying a conventional loan would be cheaper than paying the program). This idea of adverse selection came up again later in the chapter when the story of the insurance policy aimed towards fifty year old men. Eventually, the most healthy of these men dropped out of the program, then the next most healthy dropped out, and so on, until only the sickest men were left. The cost for insuring these men wasn't covered, so in theory, the cycle could continue until the insurance policy failed. I think the idea of adverse selection can be applied to many areas in economics and so therefore it is useful to know.