If borrowers take on big risks after obtaining a loan,then lenders face the problem of
A) free-riding.
B) adverse selection.
C) moral hazard.
D) costly state verification.

Question

Quizplus · Accepted Answer

The situation described in the question is an example of moral hazard. When borrowers take on big risks after obtaining a loan, they may not have the same incentive to avoid default or maximize profits as they did before obtaining the loan, since they may feel that the risk is now the responsibility of the lender. This creates a moral hazard problem for the lender, who may face losses as a result of the borrower's actions.

If Borrowers Take on Big Risks After Obtaining a Loan,then