Sumo wrestling tournaments typically have 66 wrestlers. Each ...

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Sumo wrestling tournaments typically have 66 wrestlers. Each wrestles 15 matches. A wrestler who has a winning record (eight wins or more) is guaranteed to rise in the official rankings; a wrestler with a losing record falls in the rankings.
 
  Suppose the last match of a tournament is between Wrestler A, who has won eight matches so far and Wrestler B, who has won seven. If moral hazard is a serious problem in sumo wrestling, who do you think is more likely to win this match?

Question 2

If transactions costs are low, private bargaining will always result in an efficient solution to the problem of externalities.
 
  Indicate whether the statement is true or false

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Answer to Question 1

Mark Duggan and Steven Levitt find that in these situations, the wrestler who has won seven matches so far is much more likely to win than we would expect. They interpret this is as evidence of moral hazard. Whether or not a wrestler is trying hard to win a match is private information. The two wrestlers in our example could agree to a bribe since the value of winning is much greater for B than for A but the effort they make to win are hidden actions. They find little support for an alternative explanation that B is more likely to win because he is more highly motivated.
See Duggan, M. & Levitt, S. Winning Isn't Everything: Corruption in Sumo Wrestling, American Economic Review, December 2002

Answer to Question 2

FALSE