An Efficiency Wage Premium Serves the Same Function as a Bond

question 10

Multiple Choice

An efficiency wage premium serves the same function as a bond because,just as with a bond,the premium represents

• A) the amount the employee loses if caught shirking.
• B) the expected value of the amount the employee loses if he shirks.
• C) the cost of monitoring the employee.
• D) the gain to the employee if he shirks.

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Definitions:

Taxes

Compulsory financial charges or levies collected by governments from businesses and individuals to fund public expenditures.

Negative Externalities

Costs suffered by a third party due to an economic transaction that they were not a part of.

Coase Theorem

A principle that asserts that if property rights are well-defined and transaction costs are negligible, parties will negotiate to correct externalities and allocate resources efficiently.

Private Market

A private market is a part of the financial market in which investments are negotiated directly between parties, without public market listing.