1. Moral hazard and adverse selection issues likely contributed to the sub-prime mortgage problems during the 2007-2008 recession.
   1. Give an example of how moral hazard could be a problem in a simple mortgage market with borrowers and lenders.
   2. Give an example of how adverse selection could be a problem in a simple mortgage market with borrowers and lenders.
   3. How would the process of bundling mortgages together into a security for investors (Mortgage-backed-securities) affect information asymmetries?

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Moral Hazard and Adverse Selection in Subprime Mortgages Moral Hazard Imagine a simple market with two types of borrowersresponsible lowrisk and irres... View the full answer