Kim owns a small business in Denver. She travels frequently, meeting with important customers, and attending conferences. Kim hired Matt to work in the Denver office as the day-to-day general manager of the business.
A)This is a moral hazard problem since Matt may not work as hard as Kim would like when he is not monitored.
B)Kim choosing to hire Matt is an example of adverse selection since it is possible that Matt will not work as hard as Kim expects.
C)Kim will most likely pay Matt a lower salary than normal since Kim will not be there to monitor Matt's work effort, and since Matt will not likely work hard knowing Kim cannot monitor his effort.
D)Kim is the agent and Matt is the principal.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party takes risks because they do not have to bear the full consequences, often due to lack of monitoring. Here, Matt may not work as hard as Kim desires when unsupervised.

Kim Owns a Small Business in Denver