All exercises are available on MyEconLab; *=answer appears at the back of this book; M=mathematical problem.

1. Principal-Agent Problem

  1. 1.1 California provides earthquake insurance. Because the state agency in charge has few staff members, it pays private insurance carriers to handle claims for earthquake damage. These insurance firms receive 9% of each approved claim. Is this compensation scheme likely to lead to opportunistic behavior by insurance companies? Explain. What would be a better way to handle the compensation?

  2. *1.2 Some sellers offer to buy back a good later at some prespecified price. Why would a firm make such a commitment?

  3. 1.3 A flyer from one of the world’s largest brokers says, “Most personal investment managers ...

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