Question

Gary's car is broken and he takes it to a new mechanic. The next day Gary gets a call from the new mechanic and the new mechanic gives the price for fixing his car and Gary believes that the price is too high. Bob, Garry's friend, says, “Of course they're trying to screw you—that's what they do. It's because you don't know anything about what's going on under there!”

(a) In this principal-agent problem who is the principal and who is the agent? Explain your answer carefully. (b) What is the source of the information asymmetry in this scene and what is the moral hazard? Again explain your answer carefully.

Answer 1