Answer to Question #194952 in Microeconomics for Geui

Question

An example of moral hazard in the market for university lecturers is that salaries are so low that only low-quality candidates apply for these jobs.

Is this true or false ? Why ?

Answer 1

Solution:

A moral hazard is a situation where individuals have incentives to alter their behaviors when their risk or bad-decision making is borne by others. It refers to any situation in which a particular person makes the decision about how much risk to take, while someone else bears the cost if things go badly. Moral hazards are normally present at any time two parties come into agreement with one another and there is information symmetry. Therefore, each party in the contract has a chance or opportunity to gain from acting contrary to the principles laid out by the agreement.

 

The above statement is true. The statement is a moral hazard since the low-quality candidates are taking a risk in applying for the lecturer’s jobs knowing full well that they are not qualified. Should they get hired, they will benefit from the salaries since they are not qualified, and should things go badly, the management of the institutions offering the jobs will bear full consequences for their actions. The management, on the other hand, will also benefit from paying low salaries and hence saving on costs. The low-quality candidates have nothing to lose and the loss will be the full responsibility of the hiring team should their performance deteriorate.