Microeconomics: Theory and Applications with Calculus, 4e

19 Contracts and Moral Hazards

The contracts of at least 33 major league baseball players have incentive clauses providing a bonus if that player is named the Most Valuable Player in a Division Series. Unfortunately, no such award is given for a Division Series.1

¹Tom FitzGerald, “Top of the Sixth,” San Francisco Chronicle, January 31, 1997, C6.

CHALLENGE Clawing Back Bonuses

A major cause of the 2007–2009 worldwide financial crisis was that managers and other employees of banks, insurance companies, and other firms took excessive risks. Looking back on the events that led to the financial meltdown, Goldman Sachs Chief Executive Lloyd Blankfein admitted that Wall Street firms, caught up in the pursuit of profits, had ignored risks, and that these ...