2129 - Topic 3 - Part 2

Suppose a plaintiff hires a lawyer to represent her in a court case. The lawyer will be paid a fixed fee. Under this contract,

• efficiency is achieved.

• the client bears all of the risk.

• the lawyer has an incentive to lie about his hours worked.

• All of the above.

In a principal-agent relationship, moral hazard might occur if

• the agent can hide his actions from the principal.

• the principal and agent are best friends.

• payoffs are based on a state of nature.

• the principal can hide her actions from the agent.

Which of the following acts as a hostage for employees to behave well?

• Deferred payments

• Efficiency wages

• Bonding

• All of the above.

An efficiency wage is

• lower than a living wage.

• unfair to employers.

• a wage rate above the employees' opportunity cost.

• unlikely to be paid when monitoring is available.

The benefit to employers of deferred payments is that

• adverse selection is eliminated.

• employers cannot engage in any opportunistic behavior.

• these payments raise the cost of being fired, so more monitoring is needed.

• these payments raise the cost of being fired, so less monitoring is needed.