A Risk-Averse Manager Is Hired to Run a Firm for Shareholders

question 6

Multiple Choice

A risk-averse manager is hired to run a firm for shareholders. If shareholders cannot observe the manager's effort,which would be the best employment contract?

• A)a high-powered incentive contract to elicit maximum effort.
• B)a fixed salary.
• C)a moderately powered incentive scheme that elicits some effort without exposing the manager to too much risk.
• D)an incentive scheme that provides maximum incentives and maximum insurance.

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Definitions:

General Ledger

The primary accounting record of a company that uses double-entry bookkeeping, summarizing all transactions into debits and credits.

Allowance Account

A contra asset account that reduces the gross amount of receivables to reflect a more accurate value of expected collections.

Liability Account

An accounting record tracking obligations or debts that a company owes to others.