An employer wants to make sure the firm performs very well this year and, as a result,
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Question:
Knowing this, employees decide to forego (ignore) any opportunities for new investment opportunities with many long-run benefits because they don’t want to incur a big cost (a reduction in after-tax profit) this year that will reduce their pay for future success with these projects that will not alter their compensation. The employer does not have enough information to distinguish whether the projects foregone this year were because employees truly estimated they were bad vs. good long-run investments. Thus, she cannot distinguish whether the actions by employees are good vs. bad performance this year.
Which term below BEST applies for the type of problem the employer is facing?
- Symmetric uncertainty
- Adverse-selection
- Hidden-action or moral hazard
- None of the above terms applies to the problem the employer is facing.
Related Book For
Introduction to Financial Accounting
ISBN: 978-0133251036
11th edition
Authors: Charles Horngren, Gary Sundem, John Elliott, Donna Philbrick
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