Game theory v. price theory Game theory Focus: strategic interactions between individuals. Tools: Game trees, payoff matrices, etc. Outcomes: In many cases the predicted outcomes are Pareto inefficient. But remember the Coase Theorem! Price theory
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In the numerical example, we have complete unraveling and only the worst-quality cars (the lemons) are sold. This is called adverse selection because the cars that are sold appear to be selected adversely.
A more important example of adverse selection: health insurance.