Question29 There is adverse selection into credit when the lender cannot screen good borrowers from bad due to lack of information True False ResetMaximum marks: 1 Flag question undefined

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BlackTom AI · Accepted Answer

The question concerns adverse selection into credit and whether it arises when the lender cannot screen good borrowers from bad due to lack of information.
Option 1: True. The core idea of adverse selection in credit markets is that information asymmetry makes it difficult for lenders to distinguish high-risk borrowers from low-risk ones before giving out loans. When screening capabilities are weak or information is scarce, lenders may end up allocating credit to riskier borrowers, which is precisely the adverse selection problem described.
Option 2: False. If you claim False, you’re saying that adverse selection does not occur when there is information deficiency. In fact, the absence of information and screening ability is the textbook setup for adverse selection in credit markets. The lender’s inability to differentiate borrowers based on risk increases the likelihood of loan allocations to riskier applicants, which is the opposite of what this option asserts.
To further unpack: information asymmetry between borrower and lender creates a situation where the probability profiles of applicants are not observable to the lender. Without effective screening, the pool of applicants available for credit is filtered by the lender in a way that biases toward higher-risk individuals, which is the essence of adverse selection. Conversely, if information were perfect and screening was effective, adverse selection would be mitigated or eliminated, contradicting the False option's claim.
In summary, recognizing the mechanism—information gaps leading to mispricing or misallocation of credit risk—supports the True statement, while the False statement mischaracterizes the role of information in screening and its impact on loan quality.

Question29 There is adverse selection into credit when the lender cannot screen good borrowers from bad due to lack of information True False ResetMaximum marks: 1 Flag question undefined

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Question29 There is adverse selection into credit when the lender cannot screen good borrowers from bad due to lack of information True False ResetMaximum marks: 1 Flag question undefined

查看解析

登录即可查看完整答案

类似问题

What theoretical problem does asymmetric information create in loan sales?

Which of the following statement about adverse selection is TRUE?

Part 1Which problem of asymmetric information are prospective employers trying to solve when they ask applicants to go through a job​ interview? A. Moral hazard in equity contracts. B. ​Free-rider problem. C. Adverse selection problem. D. Moral hazard in debt contracts.

Part 1Match​ (by number) each concept with its​ description:Part 2[table] Concept | Adverse selection | enter your response here [/table]

更多留学生实用工具

希望你的学习变得更简单

Part 1Which problem of asymmetric information are prospective employers trying to solve when they ask applicants to go through a job interview? A. Moral hazard in equity contracts. B. Free-rider problem. C. Adverse selection problem. D. Moral hazard in debt contracts.

Part 1Match (by number) each concept with its description:Part 2[table] Concept | Adverse selection | enter your response here [/table]