(Solved):How is credit risk related to the concepts of adverse selection and moral hazard? View Answer…

 

Question

How is credit risk related to the concepts of adverse selection and moral hazard?

 

EXPERT ANSWER

Both moral hazard and adverse selection increase the credit risk. The problem of a potential default by the borrower on grounds apart from bad luck depicts moral hazard. When an individual borrows money, he is the only one who knows whether he will repay or not. Moreover, other persons borrow money and become careless at the

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