The problem for lenders, that highest risk borrowers tend to be the most eager to take loans, is an example of
A) adverse selection.
B) moral hazard.
C) both of the above.
D) neither of the above.

Question

Quizplus · Accepted Answer

Adverse selection occurs when one party in a transaction has more information than the other, typically leading to a selection of risks that the less informed party would prefer to avoid. In this case, lenders face adverse selection because high-risk borrowers, who are more likely to default, are more eager to take out loans, and the lenders may not be able to fully distinguish them from lower-risk borrowers at the time of the loan agreement.

The Problem for Lenders, That Highest Risk Borrowers Tend to Be