...of borrowers (the incentive effect). The adverse selection effect occurs because those who are most willing to pay high interest rates may, on average, be worse risks with a higher probability of default. The incentive effect arises because an increase in interest rates...

...variety of screening devices. The interest rate that an individual is willing to pay may act as one such screening device: those who are willing to pay high interest rates may, on average, be worse risks; they are willing to borrow at high interest rates because they perceive their probability of repaying...

...variety of screening devices. The interest rate which an individual is willing to pay may act as one such screening device: those who are willing to pay high interest rates may, on average, be worse risks; they are willing to borrow at high interest rates, because they perceive their probability of re-paying...

...good borrowers, which is why a bank uses a variety of screening devices, including the interest rate. Those who are willing to pay high interest rates may, on average, be worse risks; they are willing to take higher risks to gain higher returns if successful, but such high returns are...