One way in which problems of moral hazard and adverse selection can be limited is through the use of profit sharing agreements, whereby managers and employees are given a share of the profits earned by the firm. That way the agents of the firms have a financial stake in the firm's success, and hence have their interests aligned with the principals.

Question

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Profit sharing agreements provide incentives for managers and employees to work towards the success of the firm, reducing moral hazard and adverse selection problems.

One Way in Which Problems of Moral Hazard and Adverse