Jim Range owns an ice cream store, Best Ice Cream, one of 1,000 franchises across the country. Jim doesn't like to work evenings, so he hires Mary Jo Smith to work in the store in the evening for $6.50 per hour. Mary Jo's friends come by each evening and she gives them free cones. Is this an adverse selection problem or an incentive problem? What is the solution?
What will be an ideal response?
This is an incentive problem. Jim Range is the principal and Mary Jo Smith is a shirking and malfeasant agent. Mary Jo currently believes there is no cost to herself from stealing ice cream cones to give to her friends. A solution to this incentive problem could be increased monitoring of Mary Jo's activities. Perhaps the owner could make surprise visits to monitor the Mary Jo's behavior. Or perhaps a better inventory control system could be used or an electronic device could be used to monitor the amount of ice cream sold and compare the amount of ice cream sold to cash register receipts to tackle this problem.
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