[weRven0m]

"Examples given in Akerlof's paper include the dearth of formal credit markets in developing countries, and the difficulties that the elderly encounter in buying health insurance"...may someone please shed some light on these two?

[reitzensteinm]

The insurance one is pretty straight forward. Somebody with a history of shunning insurance that changes their mind may have done it for abstract reasons (people my age probably should have insurance), or concrete ones (I am feeling a pain in my chest regularly).

If the latter can avoid being accused of having a pre existing condition, by avoiding formal diagnosis for some after signing up, they'll be an incredibly bad deal for the insurance company, and even a small minority of them in the mix of those seeking insurance will greatly increase costs.

It also applies to anyone ratcheting up their coverage.

So why don't insurance companies ratchet up prices to cover the higher costs? Because that'll actively filter out the first class of customers, leaving a higher mix of people that are pretty sure something is wrong with them.

If a decade of fighting cancer costs $5 million, anyone willing to pay $50k a year for insurance for that almost certainly knows something you don't.

Ad absurdum, you'd end up pricing your insurance at a fixed fee of $5 million up front, plus profit margin :)

For that reason, companies may just completely opt out of care for that cohort.