Question

Sophie works for a copywriter. Instead of working on the firm's projects, she works on her...

Sophie works for a copywriter. Instead of working on the firm's projects, she works on her own book with the hope of one day starting her own publishing house. The firm's shareholders are not aware of what Sophie is doing. This is a good example of what?

Group of answer choices

Shared value creation

Adverse selection

Stakeholder strategy

Moral hazard

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Answer #1

Ans: Moral hazard.

When one party has access to better or more information than the other party during a transaction, it is said that one has asymmetric information. There is asymmetric information in both adverse selection and moral hazard.

In a moral hazard situation, the change in the behaviour of one party occurs after the agreement has been made. However, in adverse selection, there is a lack of symmetric information prior to when the contract or deal is agreed upon.

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