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

Options:

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 percent loss if the borrower defaults.
C. the borrower’s lack of incentive to seek a loan for highly risky investments.
D. none of the above.

The Correct Answer Is:

A. the lender’s relative lack of information about the borrower’s potential returns and risks of his investment activities.