Moral hazard problems arise when
A)lenders have difficulty in distinguishing between good and lemon firms.
B)when a downturn in economic activity makes repaying loans difficult for borrowers.
C)borrowers have an incentive to act in ways that do not reflect the lender's interests.
D)borrowers default on loans.

Question

Quizplus · Accepted Answer

Moral hazard problems arise when borrowers have an incentive to act in ways that do not reflect the lender's interests. This can occur when borrowers take increased risks or engage in fraudulent activities because they know that the lender is bearing most of the risk. Moral hazard can also occur in insurance agreements where the insured party behaves more recklessly knowing that the insurer will bear most of the financial risk.

Moral Hazard Problems Arise When