Chap 20: Contracts and Moral Hazards

Question 1

Efficient Contract

Answer 1

An agreement with provisions that ensures that no party can be made better off without harming the other party.

Question 2

Efficiency in Production

Answer 2

A situation in which the principal’s and agent’s combined value (profits, payoffs) is maximized

Question 3

Incentive Compatible

Answer 3

referring to a contract’s provision of inducements such that the agent wants to perform the assigned task rather than engage in opportunistic behavior

Question 4

Efficiency in Risk Bearing

Answer 4

A situation in which risk sharing is optimal in that the person who least minds facing risk - the risk-neutral or less risk averse person - bears more of the risk.

Question 5

Shirking

Answer 5

a moral hazard in which all agent do not provide all the services they are paid to provide

Question 6

Contingent Fee

Answer 6

A payment to a lawyer that is a share of the award in a court case (usually after legal expenses are deducted) if the client wins and nothing if the client loses.