We can say that a contract is able to prevent moral hazard when
A) it eliminates production inefficiencies due to moral hazard without shifting risk to risk-averse people.
B) it eliminates production inefficiencies due to moral hazard without shifting risk to risk-loving people.
C) it shifts risk to risk-loving people.
D) it eliminates production inefficiencies due to moral hazard and shifts risk to risk-averse people.

Question

Quizplus · Accepted Answer

Option A states that the contract eliminates production inefficiencies due to moral hazard without shifting risk to risk-averse people. This means that the contract addresses the moral hazard problem without burdening others with the risk. Thus, the moral hazard is prevented without creating any adverse effects for risk-averse people.

We Can Say That a Contract Is Able to Prevent