Signaling can create moral hazard problems.

Question

Quizplus · Accepted Answer

Signaling refers to an action taken by an agent to convey information to a principal. However, when the agent's signal is not perfectly correlated with their type or ability, it can create moral hazard problems. This is because the agent may have an incentive to send a misleading signal to the principal to obtain a better outcome for themselves, leading to a breakdown in trust and increased risk-taking behavior.

Signaling Can Create Moral Hazard Problems