If a principal and agent have an efficient contract, then
A)one of them must be more risk-averse than the other.
B)neither can be made better off without harming the other.
C)they must have symmetric information.
D)the principal bears more of the risk.

Question

Quizplus · Accepted Answer

An efficient contract means that there is no way to make one party better off without harming the other. This implies that the contract is already optimal and that neither party can negotiate a better deal without hurting the other. Therefore, option B is correct. The other options (A, C, and D) are not necessarily true for an efficient contract.

If a Principal and Agent Have an Efficient Contract, Then