The risk that after a loan is made, the borrower has an incentive to use the proceeds for a more risky venture is ______________________.
A) adverse selection
B) default risk
C) moral hazard
D) asymmetric information.

Question

Quizplus · Accepted Answer

Moral hazard refers to the situation where the behavior of one party to a contract changes to the detriment of another after the contract has been concluded. In the context of loans, it specifically refers to the risk that a borrower might engage in riskier behavior after receiving the loan, knowing that the lender bears the risk of default.

The Risk That After a Loan Is Made, the Borrower