Adverse selection problem

• Banks have to be aware of a particular type of borrowers. Some borrowers will have hidden negative information not available to the bank. As the bank demands a higher interest rate, borrowers with safe projects will drop out. Hence, the fraction of borrowers with risky projects will depend on the interest rate. The higher the interest rate, the higher risk will be the pool of applicants. This is called the adverse selection problem.

 Embedded terms in definition
 Adverse selection
Interest rate
 Related Terms
 Adverse selection
Agency problem
Asset substitution problem
Country selection
Credit selection
Currency selection
Replacement chain problem
Security selection
Security selection decision
Self selection
Stock selection
Underinvestment problem

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