In the presence of asymmetric information,a hire contract
A) achieves production efficiency.
B) can lead to opportunistic behavior on the part of the agent.
C) is impossible to write.
D) will result in the principal earning all of the profit.

Question

Quizplus · Accepted Answer

Asymmetric information occurs when one party in a contract has more information than the other party. In a hiring contract, the employer (principal) may not have complete information about the skills, effort, or intentions of the employee (agent). This can lead to the potential for opportunistic behavior on the part of the agent, such as shirking or misrepresentation of their abilities. Therefore, option B is correct. Option A is incorrect as production efficiency may not be achieved if the agent does not provide their best effort. Option C is incorrect as it is possible to write a hire contract, even with asymmetric information. Option D is incorrect as the principal earning all of the profit is not necessarily a desirable outcome from a societal perspective.

In the Presence of Asymmetric Information,a Hire Contract