Designing a contract that aligns the interests of the buyer with the interests of the seller would reduce:
A) a mutually beneficial trade.
B) moral hazard.
C) adverse selection.
D) the principal-agent problem.

Question

Quizplus · Accepted Answer

By aligning the interests of the buyer and seller, a contract can reduce the likelihood of moral hazard, which refers to the risk that one party may take advantage of information asymmetry to behave in a way that is detrimental to the other party. By making sure that both parties benefit from the trade, the contract can reduce the risk of opportunistic behavior and improve the overall efficiency of the transaction. However, aligning interests does not necessarily guarantee a mutually beneficial trade, and it may not be able to completely eliminate adverse selection or the principal-agent problem.

Designing a Contract That Aligns the Interests of the Buyer