Multiple Choice Quiz

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1		Which of the following is not a solution for a hidden action problem?
			A)	Changing the payoffs.
			B)	Changing the equilibrium.
			C)	Changing the information structure.
			D)	Changing one of the players.
2		The intensity of incentives is positively related to
			A)	the risk aversion of the agent.
			B)	the measurement of the activities of the agent.
			C)	the extent of outside opportunities.
			D)	less discretion by the agent regarding the choice of activities.
3		The intensity of incentives is stronger when
			A)	the principal is risk neutral.
			B)	the environmental uncertainty increases.
			C)	it is more difficult to measure the activities of the agent.
			D)	the effort of the agent has more impact on the level of output.
4		The fixed part of a profit maximizing wage is determined by the
			A)	outside opportunities.
			B)	monitoring intensity principle.
			C)	incentive intensity principle.
			D)	the discretion regarding the choice of activities.
5		The equal compensation principle highlights
			A)	equity considerations between principal and agent.
			B)	the fact that different activities can be rewarded in the same way.
			C)	contractual externalities.
			D)	equity considerations between agents of similar backgrounds.
6		With regard to the equal compensation principle, the answer to the question ‘Why is there any organization?’ is
			A)	‘Integration eliminates market incentives’.
			B)	‘The ineffectiveness of option packages as rewards applies to markets, but not to firms’.
			C)	‘Equity considerations are more valuable in firms than in markets’.
			D)	‘This question can not be addressed in a complete contracting setting’.
7		The impact of inaccurate performance measurement is to
			A)	assign more responsibilities to the agent.
			B)	allow the principal more discretion.
			C)	reduce the optimal intensity of incentives.
			D)	appoint an entrepreneur in team production.
8		An incentive scheme based on relative performance is an example of
			A)	changing the information structure.
			B)	using additional information.
			C)	reducing the competition between agents.
			D)	reducing the risk aversion of agents.
9		Which of the following is not an advantage of relative performance schemes?
			A)	Eliminating common risk.
			B)	Only ordinal information is required.
			C)	Allowing agents to use local information.
			D)	Its flexibility.
10		The ratchet effect highlights the inability to design optimal contracts with strong incentives due to
			A)	the impossibility of making precise comparisons between agents.
			B)	the static nature of the interaction between the principal and the agent.
			C)	the difficulty of using additional information.
			D)	agents hiding the productive potential of tasks.