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California earthquake authority

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Reference no: EM131186051

Managerial Economics:

The California Earthquake Authority at one time used outside claim adjusters.  The claim adjusters received 9% of each approved claim.  Why did this cause a principal-agent problem?

Which of these is the correct answer?

  1. Claim adjusters were not hired directly, so their goals were different that the Earthquake Authority's goals.
  2. Claim adjusters had incentive to approve any claim, while the earthquake authority needed them to reject suspect claims.

Reference no: EM131186051

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