A modern financial system - Banks, credit constraints and collateral - Credit risk, information problems and credit constraints
3 important questions on A modern financial system - Banks, credit constraints and collateral - Credit risk, information problems and credit constraints
What is the consequence of asymmetric information?
If the bank were to charge a higher interest rate, individuals with stronger prospects would self-select away from bank credit.
Explain the problem of adverse selection
Banks will not want to be left with the lower quality applicants as a consequence of their choice of a higher lending rate, and they respond by refusing or rationing credit.
What is an unfortunate effect of the problems of moral hazard and adverse selection?
Borrowers who do not possess the wealth to provide an equity stake in their project will be denied credit, even if they have a high quality project.
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