In the moral hazard problem the:
A) agent tends to undertake more effart than the principal considers desirable
B) agent tends to undertake less effort than the principle considers desirable
C) problem of asymmetric information is absent
D) agent does not exhibit ary 'underirable' beheviour

Question

In the moral hazard problem the:
A) agent tends to undertake more effart than the principal considers desirable
B) agent tends to undertake less effort than the principle considers desirable 
C) problem of asymmetric information is absent
D) agent does not exhibit ary 'underirable' beheviour

Quizplus · Accepted Answer

In the moral hazard problem, the agent tends to undertake less effort than the principal considers desirable because the agent is insulated from the full consequences of their actions. This happens because of asymmetric information – the agent knows more than the principal about their effort level and the outcome, and this information asymmetry can lead to the agent shirking on their responsibilities. Therefore, the principal needs to design a contract or incentives that align the agent's interests with their own, to overcome the moral hazard problem.

In the Moral Hazard Problem The