In a principal-agent relationship, moral hazard might occur if
A)the agent can hide his actions from the principal.
B)the principal and agent are married.
C)payoffs are based on a state of nature.
D)the principal can hide her actions from the agent.

Question

Quizplus · Accepted Answer

Moral hazard occurs when the agent, knowing they will not bear the full cost of their actions, may act in their own self-interest rather than in the best interest of the principal. The agent hiding their actions from the principal creates a situation where the principal cannot fully monitor and control the agent's behavior, leading to moral hazard.

In a Principal-Agent Relationship, Moral Hazard Might Occur If