The problem of adverse selection helps to explain
A) which firms are more likely to obtain funds from banks and other financial intermediaries, rather than from securities markets.
B) why collateral is an important feature of consumer, but not business, debt contracts.
C) why direct finance is more important than indirect finance as a source of business finance.
D) only A and B of the above.

Question

Quizplus · Accepted Answer

Adverse selection refers to the problem where lenders cannot differentiate between high-risk and low-risk borrowers before providing a loan. Financial intermediaries like banks are better equipped to assess and manage this risk compared to securities markets, making them more likely to provide funds to firms.

The Problem of Adverse Selection Helps to Explain