Question

Which of the following practices would indicate that an employer is trying to overcome a moral-hazard problem with his employees?

a) The employer pays his workers wages that are unusually high for the industry and region.
b) The employer pays his employees year-end bonuses depending on how well the business does and his observations of the employees’ efforts.
c) The employer has voluntarily removed video cameras from the factory floor.
d) Both A and B are correct.

Answer 1

Answer:b) the employer pays his employees year end bonus according to how the business does and his observation of the employees efforts

Explanation: The best payment system to overcome moral- hazard problem by employers is to pay by piece rates.

Piece rates or payment by result system is a payment system where employees are paid in proportion to the efforts and the overall business performance. With this system both employees and employers will be satisfied with the outcomes and will in turn prevent any suspicions from the employees since the system is clearly understood by both parties and a mutual relationship we be created.