A moral hazard problem arises when:
A) An agent takes unobserved actions on his own behalf.
B) A principal hires another individual to perform some service.
C) Firms borrow money from bondholders.
D) Stockholders have to incur costs to make managers act to maximize stock price.
E) Managers are granted performance shares.

Question

Quizplus · Accepted Answer

Moral hazard occurs when an agent takes unobserved actions on their own behalf, taking risks that the principal did not intend or plan for. This can happen when the agent is protected from the negative consequences of their actions, such as through insurance or bailouts.

A Moral Hazard Problem Arises When