Question

Moral hazard means that as a firm grows and adds personnel, the new hires typically do not have the same ownership incentives as the original founders, so the new hires may not be as motivated as the founders to put in long hours or may even try to avoid hard work.

True or False?

Answer 1

Answer: True

Step-by-step explanation:

Moral hazard is a situation whereby one party gets involved in a risky event because it knows that it is safeguarded against the risk and another party will bear the cost. Moral hazard arises when both parties have incomplete information on each other.

In moral hazard, the growth of a firm will lead to the firm getting new workers. The new workers may not have the same morale as the original founders thereby may not put in all the needed effort into the work.