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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126

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Principles of Economics (MindTap C...

8th Edition
N. Gregory Mankiw
Publisher: Cengage Learning
ISBN: 9781305585126
Chapter 22, Problem 1QR
Textbook Problem
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What is moral hazard? List three things an employer might do to reduce the severity of this problem.

To determine
Moral hazard.

Explanation of Solution

Moral hazard refers to the tendency of a person who is imperfectly monitored to engage in dishonest or undesirable behavior.

To reduce the severity of the problem of moral hazard, an employer may rectify the problem by using the following strategies:

  1. 1. Better monitoring: This is to prevent irresponsible actions that might occur in the absence of supervision.
  2. 2. Paying higher wages: A worker who earns efficiency wage is unlikely to shirk his responsibility or work.
  3. 3. Delayed payments: This involves delaying part of the worker's compensation until later in the worker's life.
Economics Concept Introduction

Concept introduction:

Moral hazard: Moral hazard refers to changes in the behavior of people after they have entered into a transaction that makes the other party in the transaction worse off.

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