Seminar 8: Information Asymmetry and Principal-Agent Problem

Question 1

In a principal-agent problem, _____ is an agent of _____.

Answer 1

a management executive; the shareholders

Question 2

Principal–agent problems can exist between

a) workers and managers.
b) workers and owners.
c) workers and customers. d)owners and customers.
e) all the above.

Answer 2

all the above

Question 3

The principal–agent problem occurs as a result of:

Answer 3

the separation of ownership from management

Question 4

If the incentive system of a firm is based on team performance instead of performance by individuals, then there is an incentive for the employees to shirk. Which of the following offers a solution to this problem?

a) The Coase hypothesis
b) The principal-agent problem
c) The informativeness principle
d) The adverse selection problem
e) The free-rider problem

Answer 4

The informativeness principle

Question 5

If effort is unobservable, firms can design incentive-compatible compensation schemes by offering workers:

Answer 5

profit shares

Question 6

A technique for dealing with the principal–agent problem is to:

a) require managers to purchase shares of stock in the firm.
b) establish a profit-sharing plan for managers.
c) establish year-end bonuses based on the profits of the firm.
d) all the above.
e) none of the above

Answer 6

all the above

Question 7

The moral-hazard problem occurs when:

Answer 7

a consumer of insurance changes his or her behavior in such a way as to
increase the probability of a payoff.

Question 8

Donald has a beach house on the Outer Banks of North Carolina that was severely damaged in the most recent hurricane to strike the coast. Due to beach erosion, he has rebuilt twice in the past 20 years. He is intent on rebuilding, confident that government- provided flood insurance will cover his expenses. This is an example of:

Answer 8

moral hazard

Question 9

Adverse selection implies that:

Answer 9

the market for used cars will contain more cars of lower than average quality.

Question 10

From whom would you prefer to buy a used car, everything else being equal?

a) A mechanic.
b) A used-car dealer.
c) A family that is moving to China.
d) A person who is buying a new car.
e) You would have no preference among these choices.

Answer 10

A family that is moving to China.