1) How does collateral help to reduce the adverse selection problem in credit market?
How Moral Hazard Affects the Choice Between Debt and Equity Contracts
1) Equity contracts
A) are claims to a share in the profits and assets of a business.
B) have the advantage over debt contracts of a lower costly state verification.
C) are used much more frequently to raise capital than are debt contracts.
D) are not subject to the moral hazard problem.
2) A problem for equity contracts is a particular type of ________ called the ________ problem.
A) adverse selection; principal agent
B) moral hazard; principal agent
C) adverse selection; free rider
D) moral hazard; free rider
3) Moral hazard in equity contracts is known as the ________ problem because the manager of the firm has fewer incentives to maximize profits than the stockholders might ideally prefer.
A) principal agent
B) adverse selection
C) free rider
D) debt deflation