The XYZ Co is hiring salespersons. They will be paid a very attractive

The XYZ Co is hiring salespersons. They will be paid a very attractive hourly rate that is independent of how much they sell. Describe an adverse selection that would take place. Describe a moral hazard that would take place.

What will be an ideal response?

ANSWER

The adverse selection occurs when only below-average salespeople apply for the job. Above-average salespeople know they are good and would prefer a commission so that their income increases with their performance. Below-average salespeople do not like to work on commission because it lowers their income. The moral hazard occurs when the salespeople, once hired, are less productive than they would be if they were paid a commission instead of an hourly wage.