Rachel usually takes long coffee breaks and works less whenever her boss is out of town for business

However, she started taking shorter breaks when the Human Resource Manager at her company announced that each employee will henceforth be paid a performance-based incentive every month. What explains her behavior before and after the announcement of the new policy?

,Rachel usually works less whenever her boss goes out of town for business because it is not possible for her boss to monitor her work during those days. This is an example of the problem of moral hazard. Moral hazard refers to actions individuals take based on their private information that is unavailable to the other party in the transaction. In this case, Rachel knows how much time she spends working, while her boss does not know. This information asymmetry encourages her to take long breaks. However, when it was announced that each employee would be paid a performance-based incentive, Rachel started taking shorter breaks as she now had an incentive to work harder.