When writing contracts when actions are unobservable, it is assumed that, while the firm is risk _____________ and able to diversify its risk, the worker is risk _____________ because all of the worker's income is derived from the job.
A) preferring, neutral
B) neutral, averse
C) averse, preferring

Question

Quizplus · Accepted Answer

Firms are typically considered risk neutral because they can diversify their risks across different projects or investments. Workers, on the other hand, are often seen as risk averse because they rely on their job as their primary source of income and cannot easily diversify their employment risk.

When Writing Contracts When Actions Are Unobservable, It Is Assumed