In the presence of asymmetric information,a contingent contract
A) achieves production efficiency.
B) can lead to opportunistic behavior on the part of the agent.
C) is impossible to write.
D) will result in the principal earning all of the profit.

Question

Quizplus · Accepted Answer

In the presence of asymmetric information, a contingent contract may lead to opportunistic behavior on the part of the agent. This is because the agent may have more information about their abilities or actions than the principal, and may act in their own self-interest rather than in the best interest of the principal. Hence, while a contingent contract can mitigate information asymmetry to some extent, it is not a foolproof solution and can still result in adverse outcomes.

In the Presence of Asymmetric Information,a Contingent Contract