In: Finance
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?
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.