Chapter 8, Problem 8Q

To determine

The problem of moral hazard

Concept Introduction:

Financial Intermediation- The productive economic activity in the financial market whereby an institutional unit engages in financial transactions in the market to acquire financial assets and in the process incurs liabilities in its own account. Transaction costs and economies of large scale, asymmetric information types like adverse selection (hidden information) and Moral Hazard (hidden action) are the rationales of financial intermediation.