Sample Essay

Adverse selection takes place when people are provided with high interest rates in the market. With the availability of high interest rates, the consumer and the target investors tend to take on the opportunity for investment. It has been established that high interest rates and the high rates of return usually come with high risks as well However the moral hazard arises when the investors tend to over look the risk and do not perform analysis and activities pertaining to minimizing risks while striving to invest in high in interest rates in hope of high return. As a result the expected profits decrease. However in such situation the financial intermediaries make use of credit rationing in order to prevent high risk or probable bad investors in investing in high stakes or high interests/ rate of return marketing. Therefore adverse selection and moral hazard can give rise to credit rationing in the country. This phenomenon usually exists in the developing markets. There in hopes of high return, people are not diligent in their analysis of risk and as a result adverse selection and moral hazarding takes place.

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