Adverse selection may cause lenders to be offered opportunities to finance only:

Question

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Adverse selection occurs when lenders are offered opportunities to finance less desirable business ventures. This is because borrowers who are seen as less creditworthy, and therefore less likely to repay their loans, are more likely to seek out financing than borrowers who are more creditworthy. As a result, lenders may be more selective in their lending, only offering financing to the riskier borrowers who are willing to pay higher interest rates. This can lead to a situation where the lender is left with a portfolio of loans that are more likely to default, resulting in lower overall returns for the lender.

Adverse Selection May Cause Lenders to Be Offered Opportunities to Finance