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Moral Hazard

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.

Moral Hazard and Principal-Agent Problems

Insurance contracts are often used as examples of principal-agent problems. When it is legal to do so, a company selling health insurance policies will usually charge a higher price to someone in poor ...

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