Question

Match each of the rationales for financial intermediation listed below with at least one of the following financial intermediaries: insurance company, pension fund, savings bank. Fxplain your choices.

a. Adverse selection

b. Moral hazard

c. Lower management costs generated by larger scale

Short answer

a. Even debt service will just be problematic for such health insurer.

b. Pension fund reduces costs and risks below the amount savers would incur.

c. Savings bank increases the chance after borrowing the funds

Step-by-step solution

Introduction

Here, as we all know that the .The method whereby the financial companies absorb money through enterprises, citizens, and agencies is this would be designated as an important system since this allocates revenue to these other enterprises, people, and associations.

Moreover, financial intermediaries are institutions that transfer funds between ultimate lenders or savers and borrowers.

Insurance Company (a)

a) Insurance company: Here, adverse selection is definedbecause the tendency for high-risk projects and clients to be overrepresented among borrowers.
Given the rational is adverse selection, because insurance companies shall use the borrowed funds for projects with a high-risk of failure consequently, this should made regular debt repayment harder.

Pension fund (b)

b) Pension fund: this is often Lower management costs generated by larger scale. Because, these styles of financial intermediaries help many of us to pool their funds, thereby, increasing the dimensions ofthe whole amount of savings.

Additionally, it minimizes expenditures and liabilities less than what the investors normally bear.

Savings bank (c)

c) Savings bank: Here, moral hazards definedbecause the possibility that a borrower might engage in riskier behavior after a loan has been obtained.

Given the rational is financial loss, because there's a chance that a borrower after getting a loan may use the borrowed funds in in riskier way.
Thus, it increases the chance after borrowing the funds.