The owner of a small business applies for a bank loan and tells the loan officer that the funds will be used to expand inventory for the upcoming holiday season.The small business finds itself in need of additional funds to meet the monthly rent for the next quarter and the owner uses the loan proceeds to pay the rent.This is an example of:

Question

Quizplus · Accepted Answer

Information asymmetry occurs when one party in a transaction has more or better information than the other. In this case, the business owner had information about the intended use of the loan that was not disclosed to the bank, leading to a different use of funds than what was communicated.

The Owner of a Small Business Applies for a Bank