Monetary Fund are examples of adverse selection
and which are examples of moral hazard. (See
a. 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.
b. The IMF is considering extending loans to several
nations that failed to fully repay loans they
received from the IMF during the past decade
but now claim to be better credit risks. Now the
IMF is not sure in advance which of these
nations are unlikely to fully repay new loans.
c. The IMF recently extended a loan to a government
directed by democratically elected officials
that would permit the nation to adjust to an
abrupt reduction in private flows of funds from
abroad. A coup has just occurred, however, in
response to newly discovered corruption within
the government?s elected leadership. The new
military dictator has announced tentative plans
to disburse some of the funds in equal shares to
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