ECON206 Chapter Notes - Chapter 8: Moral Hazard

• School: University of Waterloo
• Department: Economics
• Course: ECON206
• Professor: Derek Stacey

Document Summary

Collateral: property that is pledged to the lender to guarantee payment in the event that the borrower is unable to make debt payments. Restrictive covenants: provisions that restrict and specify certain activities that a borrower can engage in. Four types are: covenants to discourage undesirable behaviour, covenants to encourage desirabl e behaviour, covenants to keep collateral valuable, covenants to provide information. Agency theory: the analysis of how asymmetric information problems affect economic behaviour. Free rider problem: the problem that occurs when people do not pay for inf ormation take advantage of the information that other people have paid for. Net worth: the difference between a firm s assets (what it owns or is owned) and its liabilities (what it owes). Principal-agent problem: a moral hazard problem that occurs when the managers in control (the agents) act in their own interest rather than in the interest of the owners (the principals) due to differing sets of incentives.