An adverse selection problem
A)increases the risk of default.
B)decreases the risk of default.
C)invites the borrower to engage in a riskier venture.
D)can be resolved by the lender gaining more information about what the loan will be used for.

Question

Quizplus · Accepted Answer

Adverse selection increases the risk of default because it involves the lender not having enough information to distinguish between high-risk and low-risk borrowers before the transaction occurs.

An Adverse Selection Problem