If a banker lacks enough information to determine exactly which applicants for a loan are good risks and which are bad risks, then he faces a(n)__________ problem.

Question

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Adverse selection occurs when one party in a transaction has more information than the other party, leading to the possibility that the better-informed party (in this case, the loan applicants) may take advantage of the other party (the banker). In this scenario, the banker lacks enough information to differentiate between good and bad risks, making it difficult for them to make informed lending decisions.

If a Banker Lacks Enough Information to Determine Exactly Which