Kevin borrowed some money from Hi Interest Bank,telling the loan officer that he intended to use the money to make repairs to his home.After getting the loan,Kevin and his girlfriend immediately took the money and headed to the nearest riverboat casino for a weekend of gambling and entertainment.
A) This is an example of adverse selection since banks have difficulty selecting their customers.
B) This is a typical example of the Condorcet Paradox.
C) From the given information, Kevin is the principal and his girlfriend is the agent.
D) From the given information, Hi Interest Bank is the principal and Kevin is the agent.

Question

Quizplus · Accepted Answer

The given information suggests that Kevin borrowed money from Hi Interest Bank, implying that Kevin is the agent and Hi Interest Bank is the principal. Moreover, Kevin's act of diverting the loan towards gambling instead of home repairs is an example of moral hazard where the principal (bank) cannot monitor or control the actions of the agent (Kevin) leading to adverse consequences. Thus, option D is correct. Option A is incorrect since adverse selection refers to the situation where the principal cannot distinguish between high-risk and low-risk borrowers. Option B is unrelated to the given information, and option C is incorrect since Kevin and his girlfriend do not represent a principal-agent relationship in this context.

Kevin Borrowed Some Money from Hi Interest Bank,telling the Loan