When Sam makes an agreement and then behaves after the agreement in a way to increase his benefits and harm then other party to the agreement,Sam is illustrating
A) moral hazard.
B) adverse selection.
C) signaling.
D) the cost of contracting.
E) a pooling equilibrium.

Question

Quizplus · Accepted Answer

Sam's behavior demonstrates moral hazard, which is the tendency for one party to take risks or act in a way that is potentially harmful to the other party once an agreement has been made. This is often due to the fact that the other party cannot fully monitor or control the actions of the first party. Adverse selection, signaling, and the cost of contracting are not relevant to this situation, and a pooling equilibrium is not mentioned in the scenario.

When Sam Makes an Agreement and Then Behaves After the Agreement