You own a car dealership and pay all of your sales people a flat salary. As a result, they don't work very hard to generate sales. This is an example of
A) adverse selection.
B) moral hazard.
C) logrolling.
D) an externality.

Question

Quizplus · Accepted Answer

Moral hazard occurs when one party in a transaction has the opportunity to assume additional risks that negatively affect the other party because the first party is protected from the consequences of their actions. In this case, because the salespeople receive a flat salary regardless of their sales performance, they may not be motivated to work hard, which negatively impacts the dealership's sales. This is a classic example of moral hazard, where the salespeople's behavior changes due to the security provided by their compensation structure.

You Own a Car Dealership and Pay All of Your