People who are the most willing to pay high interest rates for loans may have bad credit ratings. This is an example of
A) moral hazard.
B) an experience rating.
C) adverse selection.
D) a negative spillover.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction (such as a lender) has less information than the other party (such as a borrower) and the less-informed party ends up facing more risk. In this case, the lenders may not have complete information about the borrowers and may end up offering high interest rates to those with bad credit ratings, who are also more likely to default on the loan. This is an example of adverse selection in the lending market.

People Who Are the Most Willing to Pay High Interest