The possibility that a borrower will break a promise made to the lender after the loan is made is one form of
A) the moral hazard problem.
B) the adverse selection problem.
C) outside collateral.
D) inside collateral.

Question

Quizplus · Accepted Answer

The moral hazard problem refers to the possibility that a borrower might act in a way that is detrimental to the lender's interests after obtaining a loan or other credit. This might include actions such as failing to make required payments, misusing funds, or engaging in risky behavior that could lead to default. The moral hazard problem arises from the fact that borrowers may have an incentive to take such actions since they are not personally liable for the full amount of the loan, while lenders bear most of the risk. Adverse selection, on the other hand, refers to the problem of selecting which borrowers to lend to in the first place, and is not directly related to the borrower breaking promises. Outside collateral refers to assets that are not used as security for a loan, while inside collateral refers to assets that are pledged as security. Neither of these terms is directly related to the borrower's behavior after obtaining a loan.

The Possibility That a Borrower Will Break a Promise Made