If a borrower takes actions that may not lead to the best project outcome and therefore, a high risk of default, but this cannot be observed by the lender then this is related to the problem of
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JNU SIS 2021 Question 68: Asymmetric information
Answer and worked solution
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Asymmetric information has come up 16 times in 5 exams since 2014.
What this question tests
This question is on Moral hazard and hidden action, part of Asymmetric information in Microeconomics.
How insurance or contracts change behaviour that the other party cannot observe.
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Question from the JNU SIS 2021 paper. Solutions are TestStop's own. Not affiliated with or endorsed by any examination authority.