Definition of moral hazard
A situation where there is a tendency to take undue risks because the costs are not borne by the party taking the risk.
Examples of moral hazard in the following topics:
- A moral hazard is a situation where a party will take risks because the cost that could incur will not be felt by the party taking the risk .
- A moral hazard can occur when the actions of one party may change to the detriment of another after a financial transaction.
- In relation to asymmetric information, moral hazard may occur if one party is insulated from risk and has more information about its actions and intentions than the party paying for the negative consequences of the risk.
- For example, moral hazards occur in employment relationships involving employees and management.
- A lack of equal information causes economic imbalances that result in adverse selection and moral hazards.
- Asymmetric information, different information between two parties, leads to the following - adverse selection, moral hazards, and market failure.
- This is a classic case of moral hazard: the two parties deciding for the transaction to occur- patients and doctors- are not the same two exchanging money.Healthcare has a demand curve that fluctuates wildly based upon the extent of the issue - consumers who are facing serious health problems will likely demand healthcare at almost any price, allowing medical providers to take advantage of the inelastic demand.