How does the use of collateral and net worth help reduce the problem of adverse selection?
What will be an ideal response?
To make it more costly for firms to take advantage of their asymmetric information, lenders often require borrowers to pledge some of their assets as collateral, which the lender claims if the borrower defaults. When the firm's net worth is high, the firm's managers have more to lose by using borrowed money for high-risk investments.
Economics
You might also like to view...
Scarcity is illustrated graphically by a production possibilities frontier.
Indicate whether the statement is true or false.
Economics
Over the range of output for which the marginal product of labor curve is negatively sloped, the marginal cost curve is negatively sloped
Indicate whether the statement is true or false
Economics