Question

A debt contract is said to be incentive compatible if:______.

a. the borrower's net worth reduces the probability of moral hazard.
b. restrictive covenants limit the type of activities that can be undertaken by the borrower.
c. both the A or B of the above occur.
d. neither A nor B of the above occur.

Answer 1

A. the borrower's net worth reduces the probability of moral hazard