1. " An institution in our financial structure that helps reduce the moral hazard arising from the principal-agent problem is the: " and the answer isventure capital firm.Provide a general definition of the principal-agent (moral hazard) problem and explain what a venture capital firm does in the context of providing funds to businesses to help minimize the principal-agent problem.
2. "Adverse selection is a problem associated with equity and debt contracts arising from..." and the answer is "the lender's relative lack of information about the borrower's potential returns and risks of his investment activities."Provide a general statement of the adverse selection problem, explain in particular its impact on lending markets.Provide an idea as towhy the transaction costs for venture capital firms might be lower than for other lenders in their lending activities.