Question

Firms that hire outside consultants can reduce the impact of moral hazard by: A. hiring work on a fixed-fee basis B. monitoring the quality of the completed work C. hiring consultants with an established reputation for not shirking D. All of the above

Answer 1

Answer: Option C

Explanation: Moral hazard refers to a situation when an individual starts taking unnecessary avoidable risks, knowing that the potential loss will be bore by someone else.

In the given case right option is C, as the most effective way to avoid moral hazard is to hire those consultants who have a good image in market of not shirking and performing their duties well.