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17 July, 12:14

Identify the following situation currently faced by the World Bank as adverse selection or moral hazard.

The World Bank has extended loans to the government of a developing country to finance construction. of a canal with a certain future flow of earnings. Now, however, the government has decided to redirect those funds to build a casino that may or may not generate sufficient profits to allow the government to repay the loan.

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  1. 17 July, 14:02
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    Solution and Explanation:

    Moral Hazard - It is a situation when a firm or an individual modify their behaviour once the person gets what one was desired to achieve; example, insurance, funding, etc.

    Adverse selection - The firm does not information on the consumer, and, sells the product at lower price assessing a lower risk when more information would have made the seller ask for a higher price

    a) Moral Hazard

    The country changes its project plan after the World Bank extends the loan; if the World Bank has put in conditions that it be used only for a canal, then the loan cannot be used
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