In large class litigation, courts often award judgments or make import
ant decisions on the basis of the aggregate merit of the entire class
and not upon the individual merit of each member. This so-called damag
e averaging practice provides different incentives to victims with dif
ferent stakes to join a class action. When the defendant has complete
information about each plaintiff's case, adverse selection, much like
Akerlof's 'lemons' problem, arises in that low-stakes plaintiffs join
the class action and high-stakes plaintiffs opt out. However, when the
defendant does not have complete information the signaling effect ass
ociated with a plaintiff's membership decision matters; in particular,
a low-stakes plaintiff may opt out for fear that joining the class ma
y be interpreted by the defendant as evidence of a weak case. Thus, pu
re adverse selection never occurs in equilibrium. In equilibrium, a la
rge fraction of high-stakes plaintiffs may join a class action, and lo
w-stakes paintiffs may opt out.