McDonald's and other fast-food chains rely mainly on franchisees to operate their own restaurants to avoid the problem of:
A)adverse selection.
B)moral hazard.
C)insurance.
D)deductibles.

Question

Quizplus · Accepted Answer

By relying on franchisees, fast-food chains are able to mitigate the problem of moral hazard, which arises due to the divergence of incentives between the principal (fast-food chain) and the agent (restaurant manager). Franchisees have a vested interest in maintaining and growing the business, as they have invested their own capital into it. This aligns their incentives with those of the fast-food chain, reducing the likelihood of moral hazard.

McDonald's and Other Fast-Food Chains Rely Mainly on Franchisees to Operate