Moral hazard occurs when
A)an employer closely monitors an employee.
B)two people consider a trade with each other and one person has relevant information about some aspect of the product's quality that the other person lacks.
C)an employee lacks an incentive to promote the best interests of the employer, and the employer cannot observe the actions of the employee.
D)an employee closely monitors the actions of her employer.

Question

Quizplus · Accepted Answer

Moral hazard arises when one party takes undue risks because they know the impact of those risks will not be felt by them, but by someone else. In this case, an employee may engage in risky behavior because they know that the consequences of their actions will not be felt by them but by the employer. This occurs when the employer cannot observe or monitor the actions of the employee, and the employee therefore lacks the incentive to promote the best interests of the employer.

Moral Hazard Occurs When