Although debt contracts require less monitoring than equity contracts,debt contracts are still subject to ________ since borrowers have an incentive to take on more risk than the lender would like.
A)moral hazard
B)agency theory
C)diversification
D)the "lemons" problem

Question

Quizplus · Accepted Answer

Moral hazard refers to when one party in a contract has an incentive to behave in a way that is not in the best interests of the other party. In the case of debt contracts, borrowers may take on more risk than the lender would like because they do not bear the full consequences of their actions. Therefore, debt contracts are subject to moral hazard. The other options (B, C, D) are not directly applicable to the situation described.

Although Debt Contracts Require Less Monitoring Than Equity Contracts,debt Contracts