Asked by
Vickie Bellevue
on Oct 25, 2024
Verified
Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet) . What is the source of the asymmetric information problem in this case?
A) The bank has more information about the true cost of the corporate jet than the firm.
B) The bank has more information about the opportunity cost of the loaned funds.
C) The firm has more information about the actual use of the funds than the bank.
D) The firm has more information about the interest rate on the loan than the bank.
Moral Hazard
A situation in which one party engages in risky behavior knowing that it is protected against the risk by another party.
Asymmetric Information
A situation where one party in a transaction has more or superior information compared to another, often leading to an imbalance in the transaction.
Small Firms
Businesses often characterized by a small number of employees, limited market share, and possibly locally oriented markets.
- Understand the concept of moral hazard and its implications in various business contexts, including lending and insurance.
Verified Answer
PC
Learning Objectives
- Understand the concept of moral hazard and its implications in various business contexts, including lending and insurance.