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Eritrea Map for While the agent’s effort while performing these tasks determines the principal’s economic payoff from the agency relationship, the agent’s choice of effort cannot be prescribed in advance because it would be unobservable. This creates a moral-hazard problem because the agent will choose its own effort without giving any consideration to the benefits of greater effort that would accrue to the principal. As illustrated by the example of the insurance contract, solutions to moral hazard problems take the form of adaptations in the terms of the relationship between the principal and the agent that align the goals of the agent’s choice of action with the interests of the principal. Thus, for example, sales agents whose effort cannot be monitored by their principal may be compensated with commissions on actual sales, and top corporate executives whose decisions the shareholders cannot specify in advance may receive their compensation in the forms of shares or stock options. As is more generally the case for asymmetric information conditions, moral-hazard problems may be the source of economic inefficiencies when the adaptations in the terms of contracts required by the desire to alleviate the effects of moral hazard, prevent the parties from reaching other goals. Consider again the case of medical insurance presented above. The main goal of an insurance contract is to transfer the risk of medical expenses due to illness from the insured individual to the insurance company. Eritrea Map 2016.

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