Question16 Which of the following statements is true? Select one alternative: a. Information asymmetry between lenders and borrowers is eliminated if lenders can perfectly assess borrowers' creditworthiness before loans are originated. b. If information asymmetry is completely resolved, individuals can function as financial intermediaries. c. Moral hazard issues can be resolved if lenders can assess borrower's creditworthiness perfectly before loans are originated. d. The moral hazard issue primarily concerns borrowers, who may misuse borrowed funds. e. All of the statements are correct. f. None of the statements is correct. ResetMaximum marks: 2 Flag question undefined

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BlackTom AI · Accepted Answer

Question18 presents a true/false style assessment about information asymmetry, moral hazard, and the role of lenders and borrowers in financial intermediation. Here is a detailed option-by-option analysis to help you understand the reasoning behind each statement.

Option a: 'Information asymmetry between lenders and borrowers is eliminated if lenders can perfectly assess borrowers' creditworthiness before loans are originated.'
- This claim suggests that perfect assessment of creditworthiness would remove information asymmetry. In theory, if lenders could perfectly evaluate risk, many informational gaps would shrink; however, in practice, information asymmetry arises from more than just pre-loan credit evaluation. There can still be unobserved factors, moral hazard after loan origination, and adverse selection in other contexts. Therefore, this statement is overly optimistic and not entirely accurate in claiming complete elimination of information asymmetry.

Option b: 'If information asymmetry is completely resolved, individuals can function as financial intermediaries.'
- If asymmetry were completely resolved, it would reduce the need for intermediaries to screen and monitor borrowers. However, the ability of individuals to function as financial intermediaries depends on more than information symmetry alone (e.g., liquidity, risk-sharing mechanisms, regulatory frameworks). The statement is too broad and lacks consideration of practical feasibility, so it is not precisely correct.

Option c: 'Moral hazard issues can be resolved if lenders can assess borrower's creditworthiness perfectly before loans are originated.'
- Moral hazard arises from the actions borrowers take after receiving funds, not just from information available before origination. Even with perfect pre-loan credit assessment, borrowers could alter behavior post-loan (e.g., shirking effort, engaging in riskier activities). Perfect pre-screening reduces some risk but does not fully resolve moral hazard in all cases, so this statement is incorrect.

Option d: 'The moral hazard issue primarily concerns borrowers, who may misuse borrowed funds.'
- This statement identifies that moral hazard is largely about the borrower’s actions after receiving funds—such as using funds for purposes other than the loan agreement or taking on more risk. While lenders also face moral hazard related to monitoring and enforcement, the core intuition of moral hazard is indeed heavily centered on borrowers’ incentives and behavior. The option correctly captures the essence of moral hazard as it relates to borrowers.

Option e: 'All of the statements are correct.'
- Given the flaws discussed for options a, b, c, and the nuanced but central point in d, this option cannot be correct since not all statements are accurate.

Option f: 'None of the statements is correct.'
- Since option d provides a defensible and widely accepted characterization of moral hazard focusing on borrowers, this option is also not correct.

Summary of reasoning across options:
- A overclaims that perfect pre-loan assessment completely eliminates information asymmetry; information asymmetry can persist due to various factors beyond pre-origin screening.
- B asserts complete asymmetry resolution would enable individuals to act as intermediaries, which ignores practical requirements and institutions needed for intermediation.
- C erroneously claims moral hazard can be resolved by perfect credit assessment before origin, neglecting post-loan behavioral risks.
- D correctly identifies moral hazard as primarily involving borrowers’ potential misuse or suboptimal use of funds after loan origination, which aligns with standard economic definitions of moral hazard.
- E and F are aggregate judgments that fail to reflect the nuanced correctness of D and the incorrectness of the others.

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