A Debt Contract Is Said to Be Incentive Compatible If

question 45

Multiple Choice

A debt contract is said to be incentive compatible if

• A) the borrower's net worth reduces the probability of moral hazard.
• B) restrictive covenants limit the type of activities that can be undertaken by the borrower.
• C) both A and B of the above occur.
• D) neither A nor B of the above occur.

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Definitions:

Continental Shield

A large geological area composed of Precambrian crystalline rocks that are often millions of years old, making up the stable parts of continents.

Sediment-Filled Basin

A low area on the Earth's surface where sediments have accumulated over time, often due to the sinking or subsidence of the crust.

Continental Hot Spot

A volcanic region thought to be fed by underlying mantle that is anomalously hot compared with the surrounding mantle, situated in the interior of a continental plate.

Rifts

Linear zones where the Earth's crust and lithosphere are being pulled apart, often associated with volcanic activity and the formation of new oceanic crust.