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Chapter 2: Q.15 (page 97)

If there were no asymmetry in the information that a borrower and a lender had, could a moral hazard problem still exist?

Short Answer

Expert verified

Yes, since even if you are aware that a borrower is putting the loan in jeopardy, you must intervene to prevent the borrower from doing so.

Step by step solution

01

Step 1. Introduction

Moral hazard can also refer to a party's desire to take extraordinary risks in order to profit before the contract's expiration date. When two parties form an agreement with one another, moral risks can occur at any time. Each contracting party may have a vested interest in acting contrary to the agreement's principles.

02

Step 2. Explanation

In case when there is no asymmetric information between lender and borrower but the risk of moral hazard continues because, there can be some conditions under which a borrower will become insufficient in repaying debt. Thus, it will be good if we prevent borrower to lend money.

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