The risk that a borrower has more information about their previous behavior than a potential lender is known as the ________.

Question

Quizplus · Accepted Answer

The adverse selection problem refers to the situation where a potential borrower has more information about their past behavior (e.g. credit history) than a potential lender, which can lead to the lender being cautious about offering credit or offering higher interest rates to compensate for the additional risk. The moral hazard problem, on the other hand, refers to the risk that a borrower may engage in risky behavior after receiving credit, knowing that the potential losses will be borne by the lender. The other two options are not relevant concepts in finance.

The Risk That a Borrower Has More Information About Their