The authors' analysis of adverse selection indicates that financial intermediaries
A) overcome free-rider problems by holding nontraded loans.
B) must buy securities from corporations to diversify the risk that results from holding nontradable loans.
C) have not been very successful in dealing with adverse selection problems in financial markets.
D) do all of the above.
E) do only A and B of the above.

Question

Quizplus · Accepted Answer

Financial intermediaries overcome free-rider problems by holding nontraded loans, which allows them to mitigate adverse selection by directly monitoring borrowers and retaining the benefits of this monitoring, rather than these benefits being diluted among many investors as would happen with traded securities.

The Authors' Analysis of Adverse Selection Indicates That Financial Intermediaries