You are about to start working at car dealership that is currently reporting losses due to...

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Accounting

You are about to start working at car dealership that iscurrently reporting losses due to flooding but will be profitablein a few years. Assume you’re your risk adverse and your supervisorcannot fully monitor your actions. The key metrics at thisdealership include both financial data (number of sales, margin onsales) as well as qualitative data (survey of experience). You aretasked with designing a compensation contract.
Define in your own terms moral hazard andadverse-selection. Describe how the firm may want to establish acompensation contract for you given moral hazard and adverseselection issues.
Does this change depending on your level of riskaversion?
Discuss both tax and nontax factors from both theemployee and employers perspective.
Suppose a firm has a tax loss in the current period of$200, which when added to prior tax losses gives it an NOLcarryforward of $300. The top statutory tax rate is 21%. Assume anafter-tax discount rate of 10% and future taxable income of $50 peryear. What is the firm’s marginal explicit tax rate?
Create the compensation contract with points 1-4 inmind. Keep this contract to a single page. You will be graded oncreativity, presentation, and writing clarity.

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Here your solution 1 Moral hazard is a situation in which one party gets involved in a risky event knowing that it is protected against the risk and the other party will incur the cost It arises when both the parties have incomplete information about each other Description In a financial market there is a risk that the borrower might engage in activities that are undesirable from the lenders point of view because they make him less likely to pay back a loan It occurs when the borrower knows that someone else will pay for the mistake he makes This in turn gives him the incentive to act in a riskier way This economic concept is known as moral hazard Example You have not insured your house from any future damages It implies that a loss will be completely borne by you at the time of a mishappening like fire or burglary Hence you will show extra care and attentiveness You will install high tech burglar alarms and hire watchmen to avoid any unforeseen event But if your house is insured for its full value then if anything happens you do not really lose anything Therefore you have less incentive to protect against any mishappening In this case the insurance firm bears the losses and the problem of moral hazard arises How Adverse Selection Works Adverse selection describes an undesired result due to the situation where one party of a deal has more accurate and different information than the other party The party with less information is at a disadvantage to the party with more information The asymmetry causes a lack of efficiency in the price and quantity of goods and services Most information in a market economy is transferred through prices which means that adverse selection tends to result from ineffective price signals For example assume there are two sets of people in the population those who smoke and do not exercise and those who do not smoke and do exercise It is common knowledge that those who smoke and dont exercise have shorter life expectancies than those who dont smoke and do exercise Suppose there are two individuals who are looking to buy life insurance one who smokes and does not exercise and one who doesnt smoke and exercises daily However the insurance company cannot differentiate between the individual who smokes and doesnt exercise and the other person The insurance company asks the individuals to fill out questionnaires to distinguish them However the individual that smokes and doesnt exercise knows that answering See Answer

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