The risk that imperfectly monitored agents will act in dishonest or otherwise inappropriate ways is called:
A) adverse selection.
B) moral hazard.
C) systematic risk.
D) risk aversion.

Question

Quizplus · Accepted Answer

Moral hazard refers to the risk that agents will act inappropriately when they are not being monitored or when they have incentives to act in their own self-interest rather than in the best interest of the principal they are supposed to be representing. Adverse selection refers to the risk that one party to a transaction has more information than the other party and uses that information to their advantage. Systematic risk refers to risks that affect an entire market or economy, rather than just one company or individual. Risk aversion refers to an individual's tendency to prefer certainty over uncertainty, and to choose options with lower potential returns but also lower potential risks.

The Risk That Imperfectly Monitored Agents Will Act in Dishonest