Which of the following is NOT a solution to a moral hazard problem?
A)Pick the right kind of agents.
B)Give the actor "skin in the game," or a stake in the outcome.
C)Ensure that the principal has clear expectations.
D)Reward things that go along with the actions you want.

Question

Quizplus · Accepted Answer

Moral hazard problems arise when one party takes risks because another party bears the cost of those risks. Solutions typically involve aligning the interests of both parties, such as giving the actor a stake in the outcome (B) or rewarding desired actions (D). Picking the right agents (A) can also mitigate moral hazard by selecting individuals whose natural inclinations align with the principal's interests. However, ensuring that the principal has clear expectations (C) does not directly address the misalignment of incentives that characterizes moral hazard; it's more about communication and setting expectations than solving the inherent incentive issues.

Which of the Following Is NOT a Solution to a Moral