The use of collateral in bank lending can
A)induce the borrower to provide inadequate effort to manage a project
B)induce the borrower to overinvest
C)reduce moral hazard problem
D)all of the above
E)a and c only

Question

Quizplus · Accepted Answer

Collateral reduces the moral hazard problem by ensuring that borrowers have a stake in the project and are motivated to manage it effectively to avoid losing their pledged assets.

The Use of Collateral in Bank Lending Can