Moral hazard incentive problem

Reference no: EM13117385

Which of the following examples is an adverse-selection problem and which is a moral hazard incentive problem? Explain why. In each case, give one method that the firm might use to reduce the problem.

a. A Grand Forks restaurant wants to buy a used car for deliveries, but is afraid of buying a lemon.

b. A bar decides to offer an all-you-can-drink promotion that is sold for a fixed price. The bar discovers that the customers for this promotion are not its usual clientele. Instead, the customers tend be politicians who consume an amazing amount of liquor. The bar loses money on the promotion.

c. A car wash owner hires a manager who promises to work long hours. When the owner is out of town, the manager goes home early. This action results in lost profits for the firm.

d. The CEO of Best Buy takes actions that reduce the value of Best Buy stock but increase his utility.

e. Jenna buys a used Playstation3 from a classmate. She soon discovers it doesn't play movie or game disks and stops playing games after 15 to 20 minutes.

Reference no: EM13117385

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