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Chapter 2: Q.13 (page 97)

Why do loan sharks worry less about moral hazard in connection with their borrowers than some other lenders do?

Short Answer

Expert verified

Loan sharks broaden near ties with debtors a good way to pester them for money, and that they recognize that those debtors are regularly reliant on them due to the fact they can not get a mortgage from a good source.

Step by step solution

01

Step 1. Introduction

Moral hazard occur after a financial transaction and due to asymmetric information. It describes the phenomenon that occurs when people purposely get involved in risky behavior because they know they do not have to pay for it.

02

Step 2. Explanation

When moral hazard exists, lenders are more unwilling to lend to risk-takers for fear of not being paid back. Loan sharks are businesses or individuals that are willing to take on credit risks in exchange for a high interest rate. Because repayment is generally reinforced with threats of violence and extortion rather than a formal, contractual duty, these sharks are less concerned about moral hazard.

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