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Bill owns a small business in Milwaukee. He travels frequently, meeting with important customers, and attending conferences. Bill hired Nicole to work in the Milwaukee
Bill owns a small business in Milwaukee. He travels frequently, meeting with important customers, and attending conferences. Bill hired Nicole to work in the Milwaukee office as the daytoday general manager of the business.
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This is a moral hazard problem since Nicole may not work as hard as Bill would like when she is not monitored.
Bill choosing to hire Nicole is an example of adverse selection since it is possible that Nicole will not work as hard as Bill expects.
Bill will most likely pay Nicole a lower salary than normal since Bill will not be there to monitor Nicoles work effort, and since Nicole will not likely work hard knowing Bill cannot monitor her effort.
The Condorcet Paradox implies that Nicole will not work as hard as Bill would like even though he will likely pay her an above equilibrium wage.
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