Which of the following explains why a compensation contract designed to combat employee moral hazard that features strong incentives might be worse than having no incentive scheme at all?
A) Generally, an employee's effort and ability are the only two determinants of the employee's performance.
B) Employers are generally pretty skilled at measuring the aspects of job performance in which they are the most interested.
C) Workers may choose to concentrate only on the most measurable aspects of job performance at the expense at those aspects that are less easily measured.
D) Compensation contracts with strong incentives are never efficient in the presence of moral hazard.

Question

Quizplus · Accepted Answer

Workers may choose to focus only on the aspects of job performance that are easily measured and incentivized, neglecting the less measurable and harder-to-incentivize aspects of their work. This can lead to a distortion in overall job performance and potentially diminish the quality of work produced. In some cases, it may be better to have no incentive scheme at all rather than one that encourages this kind of behavior.

Which of the Following Explains Why a Compensation Contract Designed