Question

The need to monitor management actions is an example of which agency cost?

1) Information asymmetry
2) Moral hazard
3) Adverse selection
4) None of the above

Answer 1

Monitoring management actions is an example of moral hazard in insurance markets.

Step-by-step explanation:

Moral hazard arises in insurance markets because those who are insured against a risk will have less reason to take steps to avoid the costs from that risk. The need to monitor management actions is an example of moral hazard. An insurance company cannot monitor all the risks that people take all the time, so monitoring management actions is necessary to mitigate the moral hazard problem.