Which of the following is used by lenders to reduce the problems that arise from asymmetries of information?

Question

Quizplus · Accepted Answer

Collateral is used by lenders as a form of security to reduce the risk of lending to a borrower with limited credit history or negative credit history. In case of default, the lender can seize the asset pledged as collateral to recover the debt. This reduces the problems that arise from information asymmetry, where the borrower may misrepresent their creditworthiness or ability to repay the loan.

The other options are not effective in reducing the problems that arise from information asymmetry. Patent contracts only apply to intellectual property rights and do not provide any security to the lender. Decreased interest rates may encourage borrowers to take up the loan, but may not help the lender to recover the loan in case of default. Restrictive contents may limit the borrower's freedom and may not necessarily provide any form of security to the lender.

Which of the Following Is Used by Lenders to Reduce