ePack: Principles of Microeconomics 6th Edition by Gregory Mankiw

Exercise 1

Each of the following situations involves moral hazard. In each case, identify the principal and the agent, and explain why there is asymmetric information. How does the action described reduce the problem of moral hazard?
a. Landlords require tenants to pay security deposits.
b. Firms compensate top executives with options to buy company stock at a given price in the future.
c. Car insurance companies offer discounts to customers who install antitheft devices in their cars.