Suppose parents hire a baby sitter to take care for their young child while they go out to dinner. The parents want the baby sitter to play and read stories to their child while they are away, but the baby sitter would prefer to put the child to bed and watch television. Once the parents leave, if the baby sitter puts the child to bed and watches television, this is an example of_______ .

Question

Quizplus · Accepted Answer

This is an example of moral hazard because the baby sitter has the incentive to choose a less desirable option (watching television) once the parents are no longer present and cannot monitor her behavior. The parents cannot fully ensure that the baby sitter will follow their instructions, which creates a moral hazard problem.

Suppose Parents Hire a Baby Sitter to Take Care for Their