HW _7 Answers

HW _7 Answers - selection or moral hazard: Adverse...

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Brigham Young University Department of Finance ManEc 453 Money, Banking and Financial Markets Problem Set #7 Due: October 31, 2011 1) Give an example from your own life wherein you have encountered : a) Adverse Selection b) Moral Hazard 2) a) Describe the problem of asymmetric information that an employer faces in hiring a new employee: Adverse Selection: Hiring the best employee Moral hazard: Who is working hard b) Suggest a solution for each item you described in part a): Adverse Selection: Probationary periods Moral hazard: Incentive based compensation fixed salaries do not incentivize employees to do their best 3) 3) Bernie Madoff: Moral hazard, investors didn't monitor their investments adequately 5) difficult to fire manager - Debt financing would be more common than equity financing 5) Identify a situation where a public accounting firm might confront either adverse
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Unformatted text preview: selection or moral hazard: Adverse selection: Firm that trys the hardest to get an audited may not pay its bill OR may not agree with accounting firms recommendations Moral Hazard: Firm hides information from accounting firm Brigham Young University Department of Finance ManEc 453 Money, Banking and Financial Markets Problem Set #7 Due: October 31, 2011 1) Give an example from your own life wherein you have encountered : a) Adverse Selection b) Moral Hazard 2) a) Describe the problem of asymmetric information that an employer faces in hiring a new employee: b) Suggest a solution for each item you described in part a): 2) Problems 3 and 5 on page 281 in Cecchetti & Schoenholtz Chapter 11 3) Identify a situation where a public accounting firm might confront either adverse selection or moral hazard:...
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HW _7 Answers - selection or moral hazard: Adverse...

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