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24 January, 09:22

Solutions to the moral hazard problem include:

a. monitoring and enforcement of restrictive covenants

b. greater reliance on debt contracts than financial intermediatries

c. greater reliance on.

d. equity contracts and less on debt cotracts

e. low net worth

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Answers (1)
  1. 24 January, 09:49
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    Answer: Option a

    Explanation: In economics, when someone raises their risk exposure when covered, moral hazard happens, particularly when an individual takes unnecessary risks because someone else bears the burden of all those losses.

    Thus, the insuring party should enforce and monitors some restrictive covenants. Restrictive covenants refers to the agreement specifying some acts that the insured party must not do or else the potential benefits he or she is willing to get will be revoked.

    Hence from the above we can conclude that the correct option is A.
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