In 1997 America Online (AOL)started charging "rent" (a fixed fee for a "space" in its electronic store)to its electronic retailers,instead of a share of their sales revenue.
a.What is the adverse selection problem that is solved by this change?
b.What is the moral hazard problem that is solved by this change?
In answering this question,identify distinct moral hazard and adverse selection problems and the source of the information asymmetry.Describe only the problems,not the solutions.Assume also that AOL can easily monitor sales by its retailers so there is no way to "cheat" on the sales commission by,for example,diverting sales from AOL to another outlet.

Question

Quizplus · Accepted Answer

The Answer of In 1997 America Online (AOL)started charging "rent" (a fixed fee for a "space" in its electronic store)to its electronic retailers,instead of a share of their sales revenue.
a.What is the adverse selection problem that is solved by this change?
b.What is the moral hazard problem that is solved by this change?
In answering this question,identify distinct moral hazard and adverse selection problems and the source of the information asymmetry.Describe only the problems,not the solutions.Assume also that AOL can easily monitor sales by its retailers so there is no way to "cheat" on the sales commission by,for example,diverting sales from AOL to another outlet.

In 1997 America Online (AOL)started Charging "Rent" (A Fixed Fee