In the two-period model with asymmetric information, the nature of the asymmetric information is that

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In the two-period model with asymmetric information, the nature of the asymmetry is that only borrowers know whether they are bad or not. This is typically referred to as adverse selection, where borrowers have private information about their own type (i.e. whether they are good or bad) that is not known to lenders. This can lead to a situation where lenders have to offer interest rates that are higher than what they would offer in a world without adverse selection, in order to compensate for the potentially higher risk of lending to bad borrowers.

In the Two-Period Model with Asymmetric Information, the Nature of the Asymmetric