In the presence of asymmetric information, a fixed-fee contract
A)achieves production efficiency.
B)can lead to opportunistic behavior on the part of the agent.
C)is impossible to write.
D)will result in the principal earning all of the profit.

Question

Quizplus · Accepted Answer

In the presence of asymmetric information, a fixed-fee contract can lead to opportunistic behavior on the part of the agent. This is because the agent may have more information about the effort required to complete the task than the principal. Therefore, the agent may engage in shirking behavior to reduce their effort, knowing that they will still receive the fixed fee. This can lead to a reduction in production efficiency and a loss for the principal.

In the Presence of Asymmetric Information, a Fixed-Fee Contract