As the largest employer in a small town, I may be more likely to take business risks because, if the company struggles, I might expect the local government to provide financial assistance. This situation reflects which of the following?

Question

Quizplus · Accepted Answer

The situation described reflects a moral hazard problem where the manager of the company (principal) may take more risks than is optimal because they expect the local government (agent) to bail them out if things go wrong. This occurs because the manager does not bear the full consequences of their actions, creating a moral hazard.

As the Largest Employer in a Small Town, I May