A lender faces a(n) ________ problem when the lender lends funds to a borrower for a specific purpose and the borrower then opportunistically uses the funds for another purpose.
A) adverse selection
B) moral hazard
C) external cost
D) free‐rider

Question

Quizplus · Accepted Answer

This scenario describes a moral hazard problem, where the borrower has more information about their actions than the lender and uses the funds in a way that is riskier or different from what was agreed upon, potentially harming the lender's interests.

A Lender Faces A(n) ________ Problem When the Lender Lends