Moral Hazard

Moral hazard arises in situations where the consequences of a person’s decisions or actions are borne by others. The moral dilemma is that the person making decisions or taking actions has less incentive to be prudent or cautious than if he or she was fully responsible for the consequences of his or her own behavior. The hazard is felt by those who bear the consequences. Because most actions that people take have effects on others, the concept of moral hazard is typically applied to cases in which two or more parties form an agreement or contractual relationship and the arrangement itself creates the incentives for misbehavior. For example, having an incentive to exceed the posted speed limit in order to get home in time to ...