BUS 082 Lecture Notes - Lecture 31: Moral Hazard, Good Governance, Regressive Tax
17 Sep 2020
School
Department
Course
Professor
Document Summary
The principal and the agent have conflicting (not aligned) interests. There is asymmetric information (the agent possesses greater information than the principal) The principal cannot prevent opportunistic behaviour from the agent (poor incentives and imperfect monitoring) The agent"s opportunistic behaviour may lead to. Moral hazard: the agent has an incentive to behave differently from what is originally agreed. Adverse selection: the services being traded may not be of the quality expected. The problem of the principal is that of finding ways to align the interests of the agent with his/her own interests. Good governance as a two-part principal-agent problem. First part: citizens (voters) as principals, who vote to elect their agents, politicians, whose job is to enact policies in line with the voters" interests. Second part: politicians as principals, who must in turn work with their agents, civil servants, to actually implement these policies. Politicians do not promote policies in citizens" best interests or they direct funds to connected firms.
