Question

Regular bank examinations and restrictions on asset holdings indirectly help to reduce the ________ problem because, given fewer opportunities to take on risk, risk-prone entrepreneurs will be discouraged from entering the banking industry.

Answer 1

Answer:

The correct answer si moral hazard.

Explanation:

Moral hazard corresponds to opportunistic behavior in which one of the parties seeks their own benefit at the cost of the other being unable to observe or be informed of their conduct.

Moral hazard appears in the markets with asymmetric information. One party has private information about their conduct while others cannot obtain this information.

Given this asymmetry, individuals take greater risks, make less effort or take advantage of certain circumstances since they know that the cost of their actions will fall on other people.