What theoretical problem does asymmetric information create in loan sales?

Question

BlackTom AI · Accepted Answer

The prompt asks: What theoretical problem does asymmetric information create in loan sales?

The only provided option to analyze is: Buyerse worry sellers are offloading their worst loans ("lemons problem").

Consider the concept of asymmetric information in loan markets: borrowers or sellers typically have more information about the loan’s quality than buyers do. This imbalance can lead to adverse selection, where buyers fear that the loans on offer are of low quality, because those with high-quality loans are more likely to retain them rather than sell.

Reason this option is plausible: the notion of a lemons problem directly captures the idea that buyers worry they’re acquiring poorer-quality assets due to sellers’ greater information about loan performance. If buyers cannot reliably assess risk, they compensate by lowering prices or by avoiding purchases, which can push high-quality loans out of the market over time.

Now, reflecting on the phrasing: calling this the "lemons problem" aligns with standard economic descriptions of adverse selection driven by asymmetric information. The concern is not that all loans are bad, but that the pool of loans available for sale is biased toward riskier ones, precisely because sellers with better loans have less incentive to reveal or sell them in a market where buyers fear hidden defects.

Why this option helps explain the theoretical issue: it highlights how information gaps distort market outcomes, producing mispricing and reduced liquidity as a consequence of adverse selection.

About the absence of other options: the provided data lacks additional answer choices to compare. If other options were present, we would evaluate them for whether they properly describe adverse selection, moral hazard, signaling, or other information-theoretic concerns in loan sales. In their absence, we focus on why the lemons problem is a fitting description of the core asymmetric information challenge in this context.

BU.231.710.51.FA25 PoP Quiz - 2 (Week 5)

What theoretical problem does asymmetric information create in loan sales?

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类似问题

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

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]

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BU.231.710.51.FA25 PoP Quiz - 2 (Week 5)

What theoretical problem does asymmetric information create in loan sales?

查看解析

登录即可查看完整答案

类似问题

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

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]