A moral hazard problem occurs when
A)the borrower uses falsified identification.
B)the borrower engages in a riskier venture than what the borrowed funds were intended for.
C)there is an increase in default.
D)there is a decrease in default.

Question

Quizplus · Accepted Answer

A moral hazard problem occurs when the borrower engages in a riskier venture than what the borrowed funds were intended for, because they know that any losses will be absorbed by the lender or other parties, not themselves. This is sometimes referred to as moral hazard because the borrower is not bearing the full consequences of their actions.

A Moral Hazard Problem Occurs When