A bank advertises a very competitive loan interest rate. Explain what measures the bank can take to address adverse selection.
What will be an ideal response?
The advertisement will attract both high- and low-risk borrowers. The lender can collect information to distinguish the two, and offer a lower rate to the low-risk borrowers. Offering the same, average rate to the two types of borrowers would drive the low-risk borrowers to another lender.
Economics
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