A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does.This inequality of information is called
A) moral hazard.
B) asymmetric information.
C) noncollateralized risk.
D) adverse selection.

Question

Quizplus · Accepted Answer

Asymmetric information is the unequal distribution of knowledge between two parties involved in a transaction. In this case, the borrower has more information about the investment projects than the lender, creating an asymmetric information problem. Adverse selection refers to a situation where one party has more information than the other before entering into a contract. Moral hazard refers to a situation where a party takes risks because they do not bear the full consequences of the outcome. Noncollateralized risk is not a term commonly used in finance and economics.

A Borrower Who Takes Out a Loan Usually Has Better