A situation where a contract distorts incentives to behave responsibly is known as:
A)information asymmetry
B)coincidence of wants
C)pooling of funds
D)moral hazard.
E)None of these.

Question

Quizplus · Accepted Answer

Moral hazard occurs when a contractual arrangement creates incentives for one party to act recklessly or take undue risks because they do not bear the full costs of their actions. This can lead to Principal-Agent problems, where one party (the Principal) assigns tasks to another (the Agent) who may not necessarily act in the Principal's best interests due to misaligned incentives.

A Situation Where a Contract Distorts Incentives to Behave Responsibly