Adverse Selection Is a Problem Associated with Equity and Debt

question 30

Multiple Choice

Adverse selection is a problem associated with equity and debt contracts arising from

• A)the lender's relative lack of information about the borrower's potential returns and risks of his investment activities.
• B)the lender's inability to legally require sufficient collateral to cover a 100% loss if the borrower defaults.
• C)the borrower's lack of incentive to seek a loan for highly risky investments.
• D)the lender's inability to restrict the borrower from changing his behavior once given a loan.

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Definitions:

Classical Conditioning

A learning process in which two stimuli are repeatedly paired; a response that is initially elicited by the second stimulus is eventually elicited by the first stimulus alone.

Contingency Management

A behavior modification technique that involves changing behavior by modifying the consequences, typically through rewards or punishments, that follow that behavior.

Substance Use Disorder

A medical condition characterized by an uncontrollable use of substances (like drugs or alcohol) despite harmful consequences to one’s health, social life, or both.

Outpatient Mental Health Center

A healthcare facility providing mental health services to clients who visit rather than stay overnight.