Collateral requirements lessen the consequences of ________ because the collateral reduces the lender's losses in the case of a loan default and it reduces ________ because the borrower has more to lose from a default.
A)adverse selection;moral hazard
B)moral hazard;adverse selection
C)adverse selection;diversification
D)diversification;moral hazard

Question

Quizplus · Accepted Answer

Collateral requirements lessen the consequences of adverse selection by providing a way for lenders to differentiate between high-risk and low-risk borrowers (since high-risk borrowers may be less able or willing to provide collateral). They also reduce moral hazard because borrowers have more at stake if they default on the loan, making them less likely to engage in risky behavior that could lead to default.

Collateral Requirements Lessen the Consequences of ________ Because the Collateral