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 ?
Moral hazard is a bad metaphor for this crisis because its precise meaning in the economics of insurance has no one-on-one correspondence to this situation.
In economics, the solution to moral hazard is not usually to eliminate insurance, which can serve important social needs by protecting the insured against risk.
lt;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
That immediately exacerbates the moral hazard risk," said Rawling.
Overall, the study concludes that moral hazard accounted for $2,117, or 53 percent, of the $3,969 difference in spending between the most and least generous plans.
What Ip's tour through the wicked world of moral hazard teaches us is that our policymakers can do a much better job in anticipating how we will respond to their various edicts and not regulate under the assumption of some sort of behavioral stasis.
Moral hazard is typically defined as "post-contractual opportunism," where opportunism implies that actors are self-interest seeking with guile; they will deviate from the letter and the spirit of an agreement when it suits their purpose (Williamson, 1985).
The post BoC says moral hazard avoided with new law on sale of loans appeared first on Cyprus Mail .
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.
Evidence for this kind of moral hazard is identified in Rashad, Kelly, and Markowitz (Inquiry, 2009) and in Dave and Kaestner (International Journal of Health Care Finance and Economics, 2009).
Monkey Grip, The Spare Room and Moral Hazard are marketed as novels, but draw significantly on actual events, blurring the boundaries of fiction and non-fiction.
2014) offers several refinements: (1) extending the conceptualization of structural social capital to one that more clearly represents Granovetter's (1973) important tie strength via ease of monitoring/sanctioning of participant behavior; (2) considering the relational dimension of social capital proposed by Nahapiet and Ghoshal (1998); (3) using structural and relational social capital to outline network configurations that demonstrate the varying degrees of moral hazard likelihood; and (4) detailing mechanisms for altering the negative outcomes associated with kinship networks in Uganda.