moral hazard


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Related to moral hazard: Adverse selection

Moral hazard

The risk that the existence of a contract will change the behavior of one or both parties to the contract, e.g. an insured firm will take fewer fire precautions.

Moral Hazard

The risk that a party to a transaction or activity is not acting in good faith, or that one party has perverse incentives to act in a manner detrimental to the counter party. Moral hazards may exist for almost anything. For example, a plan for a government to bail out delinquent mortgages has the moral hazard that it will encourage mortgage holders to refrain from making their home payment. Likewise, deregulation has the moral hazard that companies will use it as incentive for short-term, unsustainable profits, rather than proper economic growth.

moral hazard

a situation in which one of the parties to a CONTRACT has an incentive, after the contract is agreed, to act in a manner that brings benefits to themselves at the expense of the other. For example, employees may work less conscientiously than expected by the terms of their CONTRACT OF EMPLOYMENT (i.e. they indulge in ‘shirking’ and time wasting). See PRINCIPAL-AGENT THEORY, AGENCY COST.

moral hazard

a situation in which one of the parties to a CONTRACT has an incentive, after the contract is agreed, to act in a manner that brings benefits to himself at the expense of the other party to the contract. Moral hazard is a consequence of hidden actions in TRANSACTIONS, that is, actions that parties to a transaction may take after they have agreed to execute a transaction. If these actions are unobservable to the other parties to the transaction and if they may harm the interests of these other parties, then these hidden actions may prevent the successful completion of the transaction.

Even the anticipation that such hidden action is possible may prevent the transaction from taking place. For example, if insurance companies offer fire insurance at premiums that reflect a normal likelihood of fire damage, there is a danger that people who are insured against fire accidents will tend to behave less cautiously or even with malicious intent so that fire claims upon insurance companies are excessive.

Moral hazard can also apply to EMPLOYMENT CONTRACTS where employees may work less conscientiously than was expected in their employment contracts (i.e. they engage in ‘shirking’) if work supervision is not extensive (see TEAM PRODUCTION). Moral hazard can apply particularly to employment contracts of senior managers who might not act strictly as agents of the shareholders but pursue their own goals in the absence of sufficient shareholder scrutiny (see PRINCIPAL-AGENT THEORY). See ASYMMETRICAL INFORMATION.

References in periodicals archive ?
This indicates that excess reinsurance payments were partially due to plan moral hazard. The distribution of PDP enrollees' annual OOP spending also suggested the presence of plan moral hazard (Figure S1 in Appendix SA2).
The conditional correlation approach is easy to implement; however, it is subject to the criticism of not being able to disentangle the effects of adverse selection and moral hazard. Addressing this issue, some recent studies have devoted attention to the identification of moral hazard from adverse selection using dynamic insurance data.
Indeed, it's fair to say that subscription music also has moral hazard. Spotify increases total listening-hours for its customers, just as MoviePass increases total theater-hours.
The theory of moral hazard provides a plausible transmission mechanism for connecting the compensation paid to a firm's executives with the returns on their firm's assets.
<B Beverley Thomas, second left, and Adrian Simpson, second right, with their horse Moral Hazard after winning the Mixed Open Race at Howick last Sunday (with Bradley Gibbs on board) Alun Sedgmore
"In the case of sports cars, which are already high-risk vehicles, it may be that insurers place downwards pressure on the valuation to mitigate the risk of moral hazard. An insurer obviously doesn't want to be in the position where a car is insured for more than it is actually worth.
The current article relates to this Proposition 1, the issue of individual moral hazard welfare loss, as distinct from the issue of societal welfare.
In Disentangling Moral Hazard and Adverse Selection in Private Health Insurance (NBER Working Paper No.
But bailing them out has sown the seeds for some future market crisis precisely because of the moral hazard engendered by the bailout.
We have chosen to focus our attention on client-contractor relationships in the construction industry for two main reasons, even if there are a number of other industries where moral hazard problems are very important, e.g., in finance (Fahri & Tirole 2012) and health care markets (Einav et al., 2013; Autor et al., 2014).
"Moral Hazard" appeared in the Winter 2014 issue of Nieman Reports as part of a cover package on "The State of Journalism in China" that looked at how reporters are trying to work around Chinese censorship 25 years after Tiananmen.
The problem of moral hazard is most pronounced among for-profit colleges, which enroll 12 percent of students but account for 44 percent of student loan defaults.