Economics · Contract Theory
Which of the following are CORRECT statements about the Principal-Agent problem? A. The Principal-Agent problem arises when a principal cannot perfectly observe the agent's actions (hidden action / moral hazard). B. Incentive-compatible contracts align the agent's interests with the principal's by linking agent compensation to observable outcomes. C. The first-best outcome (full information) is achievable under a fixed-wage contract because agents are fully insured against risk. D. If the agent is risk-averse, there is a trade-off between providing insurance (flat wage) and providing incentives (performance pay). E. The second-best contract under moral hazard always involves the agent bearing some risk. Choose the correct answer:
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1B, C and D only
- 2A, B and C only
- 3A and B only
- 4A, B, D and E only✓
Correct answer
A, B, D and E only
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