Bill owns a small business in Milwaukee.He travels frequently,meeting with important customers,and attending conferences.Bill hired Nicole to work in the Milwaukee office as the day-to-day general manager of the business.
A) This is a moral hazard problem since Nicole may not work as hard as Bill would like when she is not monitored.
B) Bill choosing to hire Nicole is an example of adverse selection since it is possible that Nicole will not work as hard as Bill expects.
C) Bill will most likely pay Nicole a lower salary than normal since Bill will not be there to monitor Nicole's work effort, and since Nicole will not likely work hard knowing Bill cannot monitor her effort.
D) The Condorcet Paradox implies that Nicole will not work as hard as Bill would like even though he will likely pay her an above equilibrium wage.

Question

Quizplus · Accepted Answer

The situation described in this scenario is an example of moral hazard. Moral hazard occurs when one party takes risks because they know they will not bear the full costs of those risks, in this case, Nicole may not work as hard as Bill would like when she is not monitored. Adverse selection is a situation where one party has more information than another, leading to an imbalance in the transaction, which is not applicable in this scenario. There is no information provided to suggest that Bill will pay Nicole a lower salary or that there is a connection to the Condorcet Paradox.

Bill Owns a Small Business in Milwaukee