Moral hazard is a type of principal-agent problem. Principal-agent problems arise when two entities, a principal and an agent, enter into a contract, but the principal in the contract does not have full information about the agent or about the agent’s actions.

This entry distinguishes between moral hazard— principal-agent problems involving hidden actions— and principal-agent problems involving hidden information. The entry discusses moral hazard in employment contracts and identifies a potential solution to the problem of moral hazard in employment contracts. Examples related to the economics of education are provided.