Question

In: Finance

1. What’s information asymmetry? 2. What problems could arise because of information asymmetry? 3. What methods...

1. What’s information asymmetry?

2. What problems could arise because of information asymmetry?

3. What methods does a lender use to address adverse selection problem?

4. What methods does an insurance company use to address moral hazard problem?

Solutions

Expert Solution

Ans.1. Information Asymmetry: Information asymmetry is defined as " when one party has more priviledge or information than other party in terms of taking decision making.

Ans.2.I will depicts various problems which arises because of information asymmetry:

Unfavourable Selection: Due to information asymmetry, sometimes an individual is likely to take unfavourable  selection of decisions. it will be impacted on the long term.

Creating Monopoly: An individual who has more information or knowledge than others try to create monopoly and does not allow anyone to participating in decision making process.

Ans.3. There are various methods does a lender use to address adverse selection problem in the following:

Screening of loan applicants: In this methods, lender screen of each and every loan applicants and assess the feasibility report of every loan applicants and make a detailed report of every selected applicants, then pass on to the divisional head for approval.

Credit rating Assessment: In this methods, lender can assess the credit rating of every borrower by various platforms and sources before disbursing loan amount to the borrower.

Ans.4.There are various methods does an insurance company use to address moral hazard problem in the following:

Mitigating Losses : An insurance company takeway some part of loss from insuree, it will helps in mitigating losses and overcome the problems of moral hazard.

Risk Management: An Insurance companies should established a proper risk management system, so that it will be able to reduce the risk associated with moral hazards.

I hope that this answer is helpful to you.


Related Solutions

What is the purpose of the ISO14001 and how is it used? What problems could arise...
What is the purpose of the ISO14001 and how is it used? What problems could arise when using it? Does it apply to all businesses? What non-sustainable business products or practices does it fail to address? Explain your answers.
What are some of the issues or problems that arise because of GMO's? (Ethical, or environmental,).
What are some of the issues or problems that arise because of GMO's? (Ethical, or environmental,).
8) What kind of products are common resources and what specific problems arise because of the...
8) What kind of products are common resources and what specific problems arise because of the characteristics of these products? How is this problem fixed? (15 points)
They’re 3 sources of market failure: 1. information asymmetry 2. Externalities 3. public goods Identify an...
They’re 3 sources of market failure: 1. information asymmetry 2. Externalities 3. public goods Identify an ex.ample of each of these market failures and explain why it is a market failure?( specifically in technology/education/health/ financial sectar) Then give 3 examples:
Questions 1. What are the 3 problems that might arise from the application of ABC costing?...
Questions 1. What are the 3 problems that might arise from the application of ABC costing? 2. Describe and explain the evolution of a management control system, including how budgets became a major feature of that system. 3. What is an accounting tool and why is budgeting described as an accounting tool? 4. Define kaizen budgeting and its importance for cost management. How would you incorporate kaizen budgeting in your organization? Give example.
1. Discuss possible effects of good corporate governance. 2. What is the effect of information asymmetry...
1. Discuss possible effects of good corporate governance. 2. What is the effect of information asymmetry in corporate governance? Discuss how to reduce information asymmetry between shareholders and managers.
What problems may arise in a democratic society?
What problems may arise in a democratic society?
What are some common causes of consumer problems and methods that could be used to resolve...
What are some common causes of consumer problems and methods that could be used to resolve these situations?
1) What are some of the ethical issues that could arise with the development and use...
1) What are some of the ethical issues that could arise with the development and use of CRISPR? 2) How much responsibility (if any) should the designer of CRISPR take with regard to anticipating and addressing these ethical issues.
How does Hamilton propose paying off the previous debts? What problems could arise from this, especially...
How does Hamilton propose paying off the previous debts? What problems could arise from this, especially in paying back loans with grants of land?
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT