Increases in a borrower's net worth:

Question

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Increases in a borrower's net worth can reduce the problem of moral hazard by aligning the borrower's interests with those of the lender, as the borrower has more to lose if they default on their loan. It can also lower the information costs of lending, as a borrower with a higher net worth is more likely to provide accurate and complete information about their financial position. Additionally, a higher net worth can indicate a lower risk of default, reducing the problem of adverse selection.

Increases in a Borrower's Net Worth