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| rdfs:comment | - Moral Hazard describes the consequence of institutional incentives to engage in harmful behavior. This may involve risk acceptant behavior engendered because of incentives to avoid other kinds of risks. It may take the form of public policies that encourage harmful behavior by private firms that do business with the state. The operation of private prisons is an example.
- Automobile insurance creates a moral hazard for drivers; it creates an additional incentive for risky driving because other insurance clients will pay a part of the costs of the driver's accidents. Similarly, in the presence of unemployment insurance, an unemployed person has an additional incentive to stay unemployed because other people will pay at least a part of his living expenses. Or, in the presence of health insurance, insured people will have an additional incentive to engage in risky activities or lifestyles because others will pay at least a part of the treatment in case of illness or accidents.
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| abstract | - Moral Hazard describes the consequence of institutional incentives to engage in harmful behavior. This may involve risk acceptant behavior engendered because of incentives to avoid other kinds of risks. It may take the form of public policies that encourage harmful behavior by private firms that do business with the state. The operation of private prisons is an example.
- Automobile insurance creates a moral hazard for drivers; it creates an additional incentive for risky driving because other insurance clients will pay a part of the costs of the driver's accidents. Similarly, in the presence of unemployment insurance, an unemployed person has an additional incentive to stay unemployed because other people will pay at least a part of his living expenses. Or, in the presence of health insurance, insured people will have an additional incentive to engage in risky activities or lifestyles because others will pay at least a part of the treatment in case of illness or accidents. Employees can be subject to moral hazard to the extent that they can reduce their efforts without fearing reduced pay. Debtors may be subject to moral hazard if they believe they can squander the money without negative consequences when they turn out to be incapable of paying back. Certain auditing firms have been subject to moral hazard when they sold consulting services to the very companies they were supposed to audit (for example, in the Enron case). A central bank can produce moral hazard in the banking community if the commercial bankers perceive the central bank as a lender of last resort. The IMF can produce moral hazard among debtor governments. Taxpayers are said to be subject to moral hazard if they can evade high-tax regions, and so on. Similarly, in the literature on public choice and constitutional political economy, governments and parliaments are often portrayed as agents prone to moral hazard, whereas the voters are the less informed principals.
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