#1
What is the Principal-Agent problem?
A situation where the principal benefits more than the agent.
ExplanationAsymmetric benefit distribution.
#2
Which of the following is an example of a moral hazard problem?
An insured driver driving recklessly knowing that they are covered for accidents.
ExplanationReckless behavior due to insurance.
#3
What is the term used to describe the situation where one party in a contract has more information than the other party?
Information asymmetry
ExplanationUnequal information distribution.
#4
Which of the following is an example of the Principal-Agent problem?
A CEO maximizing their own bonuses at the expense of company performance.
ExplanationSelf-interest conflicting with organizational goals.
#5
What role do economic incentives play in mitigating the Principal-Agent problem?
They align the interests of the principal and agent.
ExplanationAligning interests through incentives.
#6
Which economic theory is often used to understand Principal-Agent relationships in contracts?
Agency Theory
ExplanationTheory focusing on Principal-Agent dynamics.
#7
Which of the following is NOT a potential solution to the Principal-Agent problem?
Creating conflicts of interest
ExplanationIntroducing additional conflicts worsens the problem.
#8
Which type of agency costs arises due to the lack of effort or shirking by the agent?
Moral hazard costs
ExplanationCosts from agent's lack of effort.
#9
In the context of the Principal-Agent problem, what does the 'moral hazard' refer to?
The agent's tendency to take on excessive risk when their actions are insured.
ExplanationRisk-taking under protection.
#10
How can monitoring and performance evaluations help alleviate the Principal-Agent problem?
By providing feedback and accountability.
ExplanationEnhancing accountability through oversight.
#11
What is the role of asymmetric information in exacerbating the Principal-Agent problem?
It creates opportunities for the agent to take advantage of the principal.
ExplanationUnequal information favors exploitation.
#12
How does the Principal-Agent problem manifest in the relationship between shareholders and corporate executives?
Executives prioritizing short-term gains over long-term growth.
ExplanationShort-term focus over sustainable growth.
#13
In the context of the Principal-Agent problem, what is the purpose of a bonding cost?
To ensure the agent fulfills their obligations.
ExplanationSecuring agent's commitment.
#14
What is the primary concern regarding moral hazard in insurance contracts?
The insured party taking excessive risks due to coverage.
ExplanationExcessive risk-taking with insurance.
#15
Which economic concept is central to understanding the Principal-Agent problem?
Incomplete Contracts
ExplanationContracts lacking clarity exacerbate the issue.