Peter was recently hired as a salesman for a national consulting firm. His job involves spending a significant portion of his time out of the office visiting prospects and attending conferences. His firm is paying him a wage that is higher than the equilibrium wage, but he receives much of his income in quarterly bonuses based on how much he sells.
A)The consulting firm is trying to prevent adverse selection with its compensation strategy.
B)Peter has an incentive to go golfing with his buddies rather than conducting sales meetings.
C)The consulting firm is responding to the moral hazard problem with its compensation strategy.
D)Peter should quit this job and take a job where he gets paid an equilibrium wage more frequently.

Question

Quizplus · Accepted Answer

The consulting firm is responding to the moral hazard problem by offering Peter a higher than equilibrium wage and bonuses based on sales. This is meant to incentivize him to put in the effort to make sales and not shirk his responsibilities while out of the office. The higher wage also serves as a deterrent to him leaving the job for a lower paying one where he may have less responsibility. Adverse selection and the potential for Peter to go golfing with his buddies are not addressed by this compensation strategy. There is no indication that Peter should quit his job for a lower paying one, as he may not be able to find a job that satisfies his preferences and meets his financial needs.

Peter Was Recently Hired as a Salesman for a National