Sarah hires her friend Ben, who is studying accounting, to do and file her taxes. Ben and Sarah both know that if Ben does not put in full effort then it is highly likely that if Sarah gets audited they will find mistakes and Sarah will be punished. Because Ben's actions are hidden
from Sarah, but his actions also directly affect Sarah, this can be considered a situation of moral hazard.

Question

Quizplus · Accepted Answer

This is a classic example of moral hazard because Ben's level of effort is hidden from Sarah, and his actions (or lack thereof) can negatively impact Sarah, while he may not directly bear the consequences of his actions.

Sarah Hires Her Friend Ben, Who Is Studying Accounting, to Do