Question: Consider the moral-hazard problem that arises when a risk-averse manager, whose effort is unobservable, runs a firm on behalf of shareholders. Explain how the tradeoff

Consider the moral-hazard problem that arises when a risk-averse manager, whose effort is unobservable, runs a firm on behalf of shareholders. Explain how the tradeoff between incentives and risk prevents the firm from obtaining the fully efficient outcome. How can the moral-hazard problem be eliminated if effort is observable? How can the moral-hazard problem be eliminated if effort is unobservable but the manager is risk neutral?

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