Adverse Selection and Financial Crisis What relations?

One of the informational difficulties that hamper the well functioning of the financial markets is the adverse selection. The latter occurs when the potential borrower who is most likely to produce undesirable outcome is the one who seek out the loan and most likely to be selected (Mishkin). This situation gives rise to instability in the supply and demand forces in terms of performance and efficient capital allocation. Therefore, this market position leads to an ever increasing of low quality products (which is developed to exotic products) and a disruption in terms of confidence between borrowers and lenders. Several attempts have to be made to decrease the harsh effect of this disequilibrium either through limiting the supply of loan and set up a corrective regulation (Stiglitz & Weiss) or to establish collateral for loan (Mishkin). The disruption in the structure of the market agents leads gradually to a harsh systemic crisis. This paper seeks to highlight the gradual developmental stages from the adverse selection to the emergence of a financial crisis.