Suppose that a publisher is considering how to pay an author for writing a book. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author's effort. Paying a fixed fee for writing a book ____ an example of moral hazard because ____.
A) is; the publisher will not be able to determine whether the author is lazy
B) is; the publisher has more information than the author
C) is not; the publisher will not be able to determine whether the author is lazy
D) is not; the publisher has more information than the author

Question

Quizplus · Accepted Answer

The scenario describes a classic example of moral hazard where the publisher cannot observe the author's effort, making it difficult to ensure the author works diligently if paid a fixed fee.

Suppose That a Publisher Is Considering How to Pay an Author