Illustrate the effects of adverse selection


Assignment:

Answer all the questions tor points indicated.

Part A. Monsignor admits stealing from church.

Las Vegas- For years, Msgr. Kevin McAuliffe lived a double life.

He was widely admired by his flock at St. Elizabeth Ann Seton, which he helped build into one of the largest Roman Catholic parishes in the Las Vegas area. But at the same time, he was stealing money from the church.

Over nearly a decade, he pocketed $650,000. His motive was all too familiar in Nevada.

McAuliffe was a gambling addict.

On Friday, U.S. District Judge James C. Mahan sentenced the priest, who pleaded guilty to charges stemming from the thefts, to more than three years in prison and ordered him to pay restitution. In doing so, the judge waved off the defense's request to give McAuliffe probation.

a. In the above situation who is the principal and who is the agent? Explain.

b. How does the above situation illustrate the effects of adverse selection? Describe two actions that might have been taken to prevent these effects.

c. How does the above situation illustrate the effects of moral hazard? Describe two actions that might have been taken to prevent these effects.

Part B.

1. Discuss the tension between bank competition and bank stability.

2. What are the objectives of FDIC bank regulation?

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Microeconomics: Illustrate the effects of adverse selection
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