The putting up of outside collateral is
A) one form of the moral hazard problem.
B) one form of the adverse selection problem.
C) a signal of a high-quality borrower.
D) a signal of a low-quality borrower.

Question

Quizplus · Accepted Answer

Putting up outside collateral, such as a property or other valuable asset, can serve as a signal of a high-quality borrower. This is because borrowers who are confident in their ability to repay the loan are more likely to offer collateral to secure the loan. In this sense, offering collateral can be seen as a form of self-selection, where high-quality borrowers are more likely to offer collateral than low-quality borrowers. Therefore, option (C) is the most appropriate choice.

The Putting Up of Outside Collateral Is