When a potential borrower knows more about the risks and returns of an investment project than the bank loan officer, lenders are faced with a/an
A)adverse selection problem.
B)asymmetric information problem.
C)moral hazard problem.
D)None of the above are correct.

Question

Quizplus · Accepted Answer

Asymmetric information problem occurs when one party has more information or knowledge about a transaction than the other party. In this case, the potential borrower has more information about the risks and returns of the investment project than the loan officer. This can create challenges for the lender to accurately assess the creditworthiness of the borrower and the potential risks of the investment.

When a Potential Borrower Knows More About the Risks and Returns