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Explain how the trade-off between incentives and risk

Consider the moral-hazard problem that arises when a risk-averse manager, whose effort is unobservable, runs a firm on behalf of shareholders.

Explain how the trade-off between incentives and risk prevents the firm from obtaining the fully efficient outcome.

How can the moral-hazard problem be eliminated if effort is observable?

How can the moral-hazard problem be eliminated if effort is unobservable but the manager is risk neutral?

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Marketing Research: Explain how the trade-off between incentives and risk

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Marketing Research: Explain how the trade-off between incentives and risk

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