The situation in which an employee prefers to exert less effort compared with the effort desired by the owner because the employee's effort cannot accurately be monitored and enforced is known as a(n):
A)objective.
B)imputed cost.
C)incentive.
D)moral hazard.

Question

Quizplus · Accepted Answer

The situation described in the question is that of moral hazard. Moral hazard arises when one party (in this case, the employee) has an incentive to take risks or behave in a certain way because they do not bear the full consequences of their actions. In this case, because the owner cannot accurately monitor the employee's effort, the employee may prefer to exert less effort than desired. This is because the employee does not bear the full consequences of their lack of effort (e.g. lower productivity, lower profits for the owner), which is a classic example of moral hazard.

The Situation in Which an Employee Prefers to Exert Less