Pick the one of the following Moral Hazard / Adverse Selection / Government Regulations and read the
Question:
Pick the one of the following Moral Hazard / Adverse Selection / Government Regulations and read the scenario and discus the following questions.
You are a manager of a financial institution that gave a loan to a large corporation involved in trading in the energy market. It has a successful operation, making it among the largest corporations at the time. However, the company crashed and came with large amounts of losses. You as a manager found out that the company has been involved in a complex set of transactions by which it was keeping substantial amounts of debts and financial contracts off of its balance sheet and you were not aware of these transactions. Even after securing additional new financing from other institutions, the company was forced to declare bankruptcy and a large number of people were laid off at the same time the economy was in a downturn.
1) What is moral hazard? Do you think in this case moral hazard was an issue, or do we need to have more information?
2) If case this was an example of moral hazard, explain how the manager could reduce the problem.
3) What are the adverse economic consequences of moral hazard?
4) What is asymmetric information?
5) Do you think that further government regulations could reduce the existence of asymmetric information of financial institutions? If so, what type of regulation do you suggest for this case?Strategic Management An Integrated Approach
ISBN: 978-1111825843
10th edition
Authors: Charles W. L. Hill, Gareth R. Jones