The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.
A)noncollateralized risk
B)free-riding
C)asymmetric information
D)costly state verification

Question

Quizplus · Accepted Answer

Asymmetric information, which refers to situations where one party has more or better information than the other, can lead to adverse selection and moral hazard problems. Adverse selection occurs when the party with better information takes advantage of the other party, while moral hazard occurs when the parties behave differently because they have different levels of information or because they are not fully responsible for the outcomes of their actions. This can interfere with the efficient functioning of financial markets.

The Presence of ________ in Financial Markets Leads to Adverse