Employees at La Dola Inc often engaged in hasty decision making that resulted in losses for the company. Because employees were not individually accountable for their decisions, this trend continued

However, when the company introduced a policy of profit-sharing with its employees, they began scrutinizing their decisions carefully before implementing. Explain the reason behind the change in the employees' behavior.

Employees often do not put in their maximum efforts when they cannot be held accountable for their behavior. This was the case in La Dola Inc. before the introduction of the profit-sharing model. Such behavior is known as moral hazard. Moral hazard occurs in the labor market when employees make decisions or take actions based on their private information that is unavailable to the employers. However, when the company introduced a policy of profit-sharing with its employees, they began scrutinizing their decisions carefully before implementing. This is because the employees will lose money if the company incurs loss.