Moral hazard describes contexts in which an employee prefers to exert less effort than the effort that the owner wants because the employee's effort CANNOT be accurately monitored and enforced.

Question

Quizplus · Accepted Answer

Moral hazard occurs when there is asymmetry of information between the employer and the employee, leading to the employee having an incentive to take risks or behave inefficiently because the negative consequences will not fall solely on them. In situations where the employee's effort cannot be easily monitored or enforced, such as in some service industries, there is a greater likelihood of moral hazard occurring.

Moral Hazard Describes Contexts in Which an Employee Prefers to Exert