Severe Adverse Selection and Moral Hazard Problems Can Prevent the Formation

question 153

True/False

Severe adverse selection and moral hazard problems can prevent the formation of business relationships between principals and agents. For example, people may be unwilling to buy stock in a firm because they believe that managers may use that money for their own benefit rather than for the company's interests.

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Definitions:

Personal Nature

relates to characteristics or matters that are primarily concerning or affecting an individual rather than a broader group or organizational level.

Expressly Agree

To explicitly consent to or acknowledge something, typically in a clear and unequivocal manner.

Validly Assigned

Legally transferred or delegated to another party, in the context of rights, duties, or properties, in accordance with applicable laws and agreements.

Incidental Beneficiary

A third party who unintentionally benefits from a contract between two other parties, without having legal rights to enforce the contract's terms.