The adverse selection problem in financial markets creates a profit opportunity because
A)it opens a gap between the cost of short-term funds and the cost of long-term funds.
B)savers are willing to pay for information about the quality of potential borrowers.
C)it results in the value of a company's stock being well below the value of the company's assets.
D)it makes bond-financed projects cheaper than stock-financed projects.

Question

Quizplus · Accepted Answer

Adverse selection creates a situation where savers are uncertain about the quality of potential borrowers. This uncertainty can be reduced with the help of information, which can be provided by financial intermediaries. Financial intermediaries charge a fee for providing this information, which creates a profit opportunity.

The Adverse Selection Problem in Financial Markets Creates a Profit