Moral Hazard May Arise in Lending When Small Firms Borrow

question 126

Multiple Choice

Moral hazard may arise in lending when small firms borrow funds from banks for one project (e.g., buy new machinery for a factory) and actually use the funds in other ways (e.g., buy the manager a new corporate jet) . What is the source of the asymmetric information problem in this case?

• A) The bank has more information about the true cost of the corporate jet than the firm.
• B) The bank has more information about the opportunity cost of the loaned funds.
• C) The firm has more information about the actual use of the funds than the bank.
• D) The firm has more information about the interest rate on the loan than the bank.

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Definitions:

Independent Variable

An experimental variable that is manipulated to observe its effect on a dependent variable.

Laboratory

is a controlled setting designed for scientific experiments, research, and testing.

Field Experiment

An experiment conducted in a natural setting rather than a controlled environment to test hypotheses in real-world conditions.

Survey

A method of gathering information from a sample of individuals, typically involving questionnaires or interviews.