When managers of firms are given fixed salaries, which are not tied to the firm's profits, they generally put forth less effort than they otherwise would.This is an example of

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This scenario describes moral hazard, which is when someone who is protected from risk behaves differently than if they were fully exposed to that risk. In this case, the fixed salary protects the managers from the risk of the firm not being profitable, so they may not work as hard as they would if their compensation were tied to the firm's success. Adverse selection refers to a situation where one party has more information than the other and uses that information to their advantage in a transaction. Risk aversion refers to a preference for less risky options, and is not applicable in this scenario.

When Managers of Firms Are Given Fixed Salaries, Which Are