Successful financial intermediaries have higher earnings on their investments because they are better equipped than individuals to screen out good from bad risks,thereby reducing losses due to
A) moral hazard.
B) adverse selection.
C) bad luck.
D) financial panics.

Question

Quizplus · Accepted Answer

Adverse selection is the problem of asymmetric information where one party has more information than the other. Financial intermediaries are better equipped to screen out good from bad risks and therefore they can reduce the losses due to adverse selection. This helps them to earn higher returns on their investments compared to individuals. Moral hazard, bad luck, and financial panics are not directly related to the screening of good from bad risks.

Successful Financial Intermediaries Have Higher Earnings on Their Investments Because