How do markets for loans use signaling and screening to cope with private information?
What will be an ideal response?
Lenders in the loans market want to separate high-risk borrowers from low-risk borrowers so that they can charge high-risk borrowers a high interest rate and low-risk borrowers a low interest rate. They use signals and screens to help them do so. They screen borrowers by asking for information that helps them assess the riskiness of the loan and the borrower. If the borrower does not reveal the information requested, the lender has screened the borrower into the high-risk category. The information requested will provide signals about the borrower's riskiness. For instance, if a borrower has defaulted on debt in the past this fact signals that the borrower is a high-risk individual.
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