When the borrower has more knowledge about the attributes of an investment project than the lender, then the lender has a problem of:
A) adverse selection.
B) moral hazard.
C) risk aversion.
D) systematic risk.

Question

Quizplus · Accepted Answer

Adverse selection refers to the problem that arises when one party (in this case, the borrower) has more information about the quality of an investment project than the other party (the lender). This can lead to a situation where the lender is uncertain about the riskiness of the investment, and may either reject the project or charge a higher interest rate to compensate for the additional risk. Moral hazard, on the other hand, is the problem that arises when the borrower has an incentive to undertake risky behavior once the loan has been approved, since they bear less of the risk than the lender. Risk aversion refers to an individual's preference for avoiding risk, and systematic risk is related to the risks inherent in the overall market or macroeconomic conditions.

When the Borrower Has More Knowledge About the Attributes of an Investment