The two most important results of asymmetric information relevant to financial

services are known as moral hazard and adverse selection.

Moral hazard can arise when someone's behaviour changes based on their
access to financial services. For example, a business person may make a riskier
investment after taking a loan with a high interest rate (to try to get a higher rate
of profit and so repay the loan more easily). So, in this case, high interest rates
can cause risky behaviour. Another example is when a person who has taken out
insurance against their car being damaged will drive less carefully because they
know they will not have to pay for it in case of an accident. Those providing the
financial services have to work out ways to prevent the users of the service
acting in this way. They may require other information about the clients that can
reassure them that they will not do risky things, they may require certain forms of
assurance (for example, collateral for loan takers, or a deductible for someone
taking insurance) or they may simply decide not to lend to certain clients about
whom they are not confident.

Adverse selection refers to the fact that it is often people whose activities are
particularly risky who take high interest loans, or buy insurance. As it is not
possible for lenders or providers of insurance to be sure how risky their
customers' behaviour is, they have to use various mechanisms to screen
potential borrowers. These methods are inevitably imprecise, which means that
some potentially sound customers are rejected.