When the least desirable credit risks are the ones most likely to seek loans,lenders are subject to the
A) moral hazard problem.
B) adverse selection problem.
C) shirking problem.
D) free-rider problem.
E) principal-agent problem.

Question

Quizplus · Accepted Answer

The adverse selection problem occurs when the least desirable credit risks are the ones most likely to seek loans because they need financing the most, while borrowers who are more creditworthy may not seek loans as they may have other options available. This creates a situation where lenders may end up lending to a riskier pool of borrowers than they intended, leading to increased risk of default and losses.

When the Least Desirable Credit Risks Are the Ones Most