Because of the adverse selection problem,
A) lenders may make a disproportionate amount of loans to bad credit risks.
B) lenders may refuse loans to individuals with low net worth.
C) lenders are reluctant to make loans that are not secured by collateral.
D) all of the above.

Question

Quizplus · Accepted Answer

Adverse selection refers to the problem where lenders cannot perfectly distinguish between high-risk and low-risk borrowers. This leads to a situation where lenders may end up giving more loans to bad credit risks (A), may refuse loans to individuals who appear to be low net worth due to lack of information (B), and may be reluctant to offer unsecured loans, preferring those backed by collateral to mitigate risk (C).

Because of the Adverse Selection Problem