Identifying Common Incentive Mechanisms
Consider two separate situations:
- A bank requires a borrower to pledge their business equipment as collateral before approving a loan.
- A company pays its employees a wage significantly higher than they could earn elsewhere, creating a strong incentive for them to keep their jobs.
Explain the single, underlying economic principle that both the bank's collateral requirement and the company's high-wage strategy are designed to address. Describe how this principle works to align the interests of the parties in each situation.
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CORE Econ
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