In the Presence of Asymmetric Information,a Contingent Contract

question 77

Multiple Choice

In the presence of asymmetric information,a contingent contract

• A) achieves production efficiency.
• B) can lead to opportunistic behavior on the part of the agent.
• C) is impossible to write.
• D) will result in the principal earning all of the profit.

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Definitions:

Perpetual fund

A type of investment fund with no fixed termination date, allowing investors to contribute and withdraw capital indefinitely.

Compounded annually

Interest on a deposit or loan calculated once per year, where each year's interest is added to the principal.

Semi-annual compounded

Interest on an investment is calculated twice a year and added to the principal.

Nominal rate

The stated or face interest rate on a loan or investment, not adjusted for inflation or the frequency of compounding.