The problem for lenders, that a borrower has the incentive to take chances once the loan is made, is an example of
A) adverse selection.
B) moral hazard.
C) both of the above.
D) neither of the above.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party. In the context of lending, once a borrower has received a loan, they may engage in riskier behavior or investments, knowing that the lender bears some of the risk, especially if the loan is secured or if bankruptcy laws limit the borrower's liability.

The Problem for Lenders, That a Borrower Has the Incentive