Please answer the following questions urgently.
Need to be answered in less than 1.5 hour.
What is adverse selection? Give an example to illustrate what adverse selection is. What mechanisms exist to mitigate it?
What is moral hazard?
Give an example to illustrate what moral hazard is. What mechanisms exist to mitigate it
Suppose that a publisher is considering how to pay an author for writing abook. The publisher would like the author to put forth his maximum effort, but the publisher is unable to observe the author’s effort.
a. In this example, who is the principal and who is the agent?
b. What is the moral hazard in paying an author a fixed fee for writing a book? Is there an alternative way of paying the author that would lead to greater effort?