Author Question: Which are social costs associated with the inability of shareholders to observe an executive's ... (Read 96 times)

123654777 · **on:** Jul 1, 2018

Which are social costs associated with the inability of shareholders to observe an executive's effort? (You may choose more than one.)
a. Excessive insurance offered.
b. The executive has to be exposed to risk to induce effort, and risk is costly.
c. The executive ends up exerting less than first-best effort.
d. Excessive effort induced.

Question 2

Given a series of contracts offered to an executive having the same slope (where slope refers to how the contract varies with changes in the firm's gross profits) but different intercepts (referring to the overall generosity of the contract). Which of these is not a consideration in figuring out which of these intercepts the shareholders would decide to build into the contract offered to the executive?
a. if too generous a contract is offered, this comes out of the firm's bottom-line profit.
b. if too generous a contract is offered, the executive may become lazy and not exert the required effort.
c. if the contract isn't generous enough, the executive will decide to work elsewhere.
d. if the contract isn't generous enough, only low-ability executives will apply.