Title: How to attract the best possible executive to be your new CEO
Abstract: The two information asymmetry problems I face in hiring my next CEO are adverse selection and moral hazard. Information asymmetry problems arise when two parties have different levels of information. For example, if an employer hires an employee, each party has information which the other does not have. The employer knows the difficulty of how the work is to manage but the employee knows what amount of work he is willing to contribute. This is called the principal-agent problem. The principal is the employer who hires an agent, the employee to work for him. A principal-agent problem only comes up when information asymmetry exists. Two major problems of asymmetric information are adverse selection and moral hazard. Adverse selection is the issue of pitching the right type of agent. Moral hazard is the issue that the agent shirks after being hired. For example, if the British Secret Intelligence Service hires James Bond, it has to consider the adverse selection problem before the hire and the moral hazard problem after the hire. The problems the government would have to select the ideal candidate who is willing to kill on behalf of the country and for a government paycheck are the adverse selection problem. An adverse selection would be a person who is willing to kill for any other reason like a psychopath. The moral hazard problem is to make sure that the candidate does not change behaviour and is willing to work as hard as before the hire. James Bond for example has the incentive to exaggerate the difficulty of the assignment to extend his exotic life on the assignment. The government instead has no information if Bonds exotic requests are justified because Bond is the expert.