Solutions to the moral hazard problem includeA) low net worth.B) monitoring and enforcement of restrictive covenants.C) greater reliance on equity contracts and less on debt contracts.D) greater reliance on debt contracts than financial intermediaries.

What is “moral hazard” problem? How does it lead toinefficient allocation of resources? Suggest remedial measures.

1. The "lemons problem" exists because ofA) transactions costs.B) economies of scale.C) rational expectations.D) asymmetric information.2. A lesson of the Enron collapse is that government regulationA) always fails.B) can reduce but not eliminate asymmetric information.C) increases the problem of asymmetric information.D) should be reduced.3. Solutions to the moral hazard problem includeA) low net worth.B) monitoring and enforcement of restrictive covenants.C) greater reliance on equity contracts and less on debt contracts.D) greater reliance on debt contracts than financial intermediaries.4. Because of the weak systems of property rights in many developing and transitioneconomies, the financial system is unable to use collateral effectively worsening the________ problem.A) adverse selectionB) moral hazardC) principal/agentD) diversification5. A debt contract is incentive compatibleA) if the borrower has the incentive to behave in the way that the lender expects and desires,since doing otherwise jeopardizes the borrower's net worth in the business.B) if the borrower's net worth is sufficiently low so that the lender's risk of moral hazard issignificantly reduced.C) if the debt contract is treated like an equity.D) if the lender has the incentive to behave in the way that the borrower expects and desires.6. Property that is pledged to the lender in the event that a borrower cannot make his or herdebt payment is calledA) collateral.B) points.C) interest.D) good faith money.7. Collateralized debt is also known asA) unsecured debt.B) secured debt.C) unrestricted debt.D) promissory debt.8. A clause in a mortgage loan contract requiring the borrower to purchase homeowner'sinsurance is an example of aA) proscriptive covenant.B) prescriptive covenant.C) restrictive covenant.D) constraint-imposed covenant.9. The current structure of financial markets can be best understood as the result of attemptsby financial market participants toA) adapt to continually changing government regulations.B) deal with the great number of small firms in the United States.C) reduce transaction costs.D) cartelize the provision of financial services.10. Financial intermediaries develop ________ in things such as computer technology whichallows them to lower transactions costs.A) expertiseB) diversificationC) regulationsD) equity

Moral hazard is an important concern of insurance arrangements because the existence ofinsuranceA) provides increased incentives for risk taking.B) is a hindrance to efficient risk taking.C) causes the private cost of the insured activity to increase.D) creates an adverse selection problem but no moral hazard problem

Which of the following best describes the concept of "moral hazard" in insurance?a)The risk of a catastrophic event occurringb)The possibility of fraudulent claims being madec)The degree of uncertainty associated with a particular riskd)The tendency of insured parties to behave more recklessly or negligently

Because of the weak systems of property rights in many developing and transitioneconomies, the financial system is unable to use collateral effectively worsening the________ problem.A) adverse selectionB) moral hazardC) principal/agentD) diversification