Examples
A bank that can expect high profits from risky investments or a government rescue should the investments fail.A company executive who will be rewarded with a high bonus if risks go well and significant benefits if their employment is terminated due to risks working out badly.A mortgage originator who is paid to acquire mortgage contracts but incurs no consequences if those mortgages turn out to be poor quality.An agent who is paid a commission to purchase art investments but pays no costs if these investments fail.A business owner who is careless about fire risks because they have comprehensive fire insurance with a low deductible.A corporate culture that allows managers to claim responsibility for successes and assign blame for failure to subordinates.A company with close ties to a government that continues to get new contracts despite a history of delivering cost overruns and failed projects.A monopoly that loses no customers when it takes risks that impact customer satisfaction.Overview: Moral Hazard | ||
Area | ||
Definition | A situation in which a decision maker can take risks without paying the costs if things go badly. | |
Related Concepts |