Moral hazard

principal

Entrusts someone with a task

asymmetric information

situation in which one party is more informed than another because of the possession of private information

The Great Recession and Salesperson Compensation

What are the two examples discussed in the presentation of Moral Hazards?

Principal-Agent Problem

a conflict in priorities between a person or group and the representative authorized to act on their behalf. An agent may act in a way that is contrary to the best interests of the principal.

agent

a person who carries out a task on someone else's behalf

Adverse Selection

a state that occurs when buyers and sellers have different information about the quality of a good or the riskiness of a situation; results in failure to complete transactions that would have been possible if both sides had the same information

Moral Hazard

the tendency for people to behave in a riskier way or to renege on contracts when they do not face the full consequences of their actions