Because There Is an Imbalance of Information in a Lending

question 23

Essay

Because there is an imbalance of information in a lending situation,we must deal with the problems of adverse selection and moral hazard. Define these terms and explain how financial intermediaries can reduce these problems.

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Definitions:

Variable-Interval

A schedule of reinforcement where a response is rewarded after an unpredictable amount of time has passed, in experimental and learning contexts.

Variable-Ratio

A schedule of reinforcement where a response is rewarded after an unpredictable number of responses, commonly used in behavior modification and training.

Fixed-Ratio

A schedule of reinforcement where a response is reinforced only after a specified number of responses.

Internal Locus of Control

The belief that individuals control their own destiny and outcomes are the result of their own actions.