Reference no: EM13990347
1. Classify each of the following as examples of Moral Hazard, Adverse Selection or Neither. Explain your answer and note one way to alleviate the problem.
a) A board of directors oversees the operations of a company and its management.
b) Stock holders may not get the optimal amount of dividends because profits are reinvested in the company in order to maximize the CEO's influence.
c) The principle-agent problem
d) The lemons problem
e) Some people claim that: A free democracy in Iraq could encourage emmigration of freedom seeking Iranian students from Iran to Iraq thus reducing the pressure on the Iranian government to reform.
f) Some people claim that: A functioning democracy in Iraq will cause the Iranian government to tighten restrictions on its population, making democracy in Iran less likely to occur peacefully.
g) A depressed individual might buy life insurance before committing suicide.
2. Is the lemons problem more severe for bonds issued by democratic governments or dictatorships? Explain.
3. Which of the following are attempts to solve an asymmetric information problem? Explain.
a) Auditing firms (hired by the board of directors and approved by the shareholders)
b) Stock broker's commissions
c) Private Production and sale of information
d) Financial intermediation
e) Collateral
4. Rich people often worry that others will seek to marry them only for their money. Is this a problem of adverse selection? Explain
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