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:

Question

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The situation described is an example of moral hazard, which occurs when one party has an incentive to take risks that the other party has to bear the consequences of. In this case, the managers have a fixed salary and therefore do not bear the consequences of any negative (or positive) impacts on the firm's profits, leading to less effort being put forth.

When Managers of Firms Are Given Fixed Salaries,which Are Not