Consider the following scenario: You have been asked to join a new student group at USD. This group is forming with the purpose of becoming a consulting group. They will be recruiting clients for consulting projects such as analysis of business environments, projections of business profitability, and forecasting the outcome from a business expansion. Two responsible and intelligent students are running the organization, Tim and Vanessa. Since they have both taken economics with Dr. B, they know all about adverse selection and moral hazard. For each of the issues below, indicate whether you think it could cause an adverse selection or moral hazard problem. (1=Adverse Selection, 2=Moral Hazard)
In order to get more students in the group, Tim and Vanessa visit classes in the B-school and tell the students all about the group. They indicate that they are looking for students with a very high GPA who will spend a 20 hours per week on the projects including writing research reports and giving presentations to business owners, but they cannot offer any wages or course credit for participation.
In order to get more consulting clients, they advertise to the Vermillion Chamber that this service is available at no cost to the business owner.
The group is awarded a Beacom Business School grant for software programs needed to do the projects. They didn’t need all of the grant for software and decide to use the remainder for an end of the semester party.
After obtaining Joe’s Crabby Shack as a client, this consulting group is granted access to all of the proprietary information about Joe’s business. Vanessa’s father owns a business similar to the Crabby Shack in a neighboring town. After reviewing the data for the consulting project, Vanessa shares some of the information about Joe’s operation with her father.