Editing Adverse selection (section)

===Adverse selection and collateral in lending market===

In accordance with the research from Loannidou, Pavanini & Peng in April 2022, the adverse selection theory also plays a significant role in determining the lending market performance based on the incremental costs of collateral and debt contracts. 

While the recent research also pointed out that, in separation of ex ante and ex post channels of collateral, the increasing level of adverse selection moral problem is having significant effects on bond markets and lenders' spirit. While the empirical evidences and statistical model both suggested that, the utilization of collateral could reduce the negative effect of adverse selection. In practice, through the promotion of information sharing system and credit rating mechanism, it is expected that, within the lending market regulations on collateral contact, the relevant stakeholder could have better incentives and techniques to reduce the social welfare cost that is cause by adverse selection. 

By including a separate borrower, there is sufficient evidence to conclude that, under the diversification lending strategy, the implementation of collateral could effectively mitigate the adverse selection issues, and adjust the borrower's financial behaviour into a positive direction.