Moral Hazard

Moral hazard is a risk for a person A resulting from the choices of another person B. It denotes the probability that B chooses to consume economic goods because these goods are provided gratuitously by A, against A’s will. The probability of B’s choice represents a risk for A. This risk is called moral hazard. It springs directly from B’s personal preferences and indirectly from the causes of these preferences. The latter can be internal (such as B’s character and worldview) and external (material incentives for B to enrich himself at the expense of A). Moral hazard is a widespread phenomenon in market, nonmarket, and political behavior. It not only entails waste and third-party damage but can also be the root of systemic risks, most ...