Consider each of the following situations involving moral hazard. In each case identify the principal (uninformed party) and the agent (informed party) and explain why there is asymmetric information. How does the action described for each situation mitigate the moral hazard problem? a. Car insurance companies offer discounts to customers who install anti-theft and speed-monitoring devices in their cars. b. The International Monetary Fund conditions lending to developing countries upon the adoption of a structural adjustment plan. c. Firms compensate top executives with options to buy company stock at a given price in the future. d. Landlords require tenants to pay security deposits.
Consider each of the following situations involving moral hazard. In each case identify the principal (uninformed party) and the agent (informed party) and explain why there is asymmetric information. How does the action described for each situation mitigate the moral hazard problem?
a. Car insurance companies offer discounts to customers who install anti-theft and speed-monitoring devices in their cars.
b. The International Monetary Fund conditions lending to developing countries upon the adoption of a structural adjustment plan.
c. Firms compensate top executives with options to buy company stock at a given price in the future.
d. Landlords require tenants to pay security deposits.
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