moral hazard

n.1. The risk to an insurance company that the holder of a policy will destroy the insured property in order to collect the monetary reimbursement available under the policy.2. The risk that an individual or organization will behave recklessly or immorally when protected from the consequences.

moral hazard

n (Insurance) insurance a risk incurred by an insurance company with respect to the possible lack of honesty or prudence among policyholders

Thesaurus

Noun

moral hazard - (economics) the lack of any incentive to guard against a risk when you are protected against it (as by insurance); "insurance companies are exposed to a moral hazard if the insured party is not honest"economic science, economics, political economy - the branch of social science that deals with the production and distribution and consumption of goods and services and their managementendangerment, hazard, jeopardy, peril, risk - a source of danger; a possibility of incurring loss or misfortune; "drinking alcohol is a health hazard"

moral hazard

Moral hazard

The risk that the existence of a contract will change the behavior of one or both parties to the contract, e.g. an insured firm will take fewer fire precautions.

Moral Hazard

The risk that a party to a transaction or activity is not acting in good faith, or that one party has perverse incentives to act in a manner detrimental to the counter party. Moral hazards may exist for almost anything. For example, a plan for a government to bail out delinquent mortgages has the moral hazard that it will encourage mortgage holders to refrain from making their home payment. Likewise, deregulation has the moral hazard that companies will use it as incentive for short-term, unsustainable profits, rather than proper economic growth.

moral hazard

a situation in which one of the parties to a CONTRACT has an incentive, after the contract is agreed, to act in a manner that brings benefits to themselves at the expense of the other. For example, employees may work less conscientiously than expected by the terms of their CONTRACT OF EMPLOYMENT (i.e. they indulge in ‘shirking’ and time wasting). See PRINCIPAL-AGENT THEORY, AGENCY COST.

moral hazard

a situation in which one of the parties to a CONTRACT has an incentive, after the contract is agreed, to act in a manner that brings benefits to himself at the expense of the other party to the contract. Moral hazard is a consequence of hidden actions in TRANSACTIONS, that is, actions that parties to a transaction may take after they have agreed to execute a transaction. If these actions are unobservable to the other parties to the transaction and if they may harm the interests of these other parties, then these hidden actions may prevent the successful completion of the transaction.

Even the anticipation that such hidden action is possible may prevent the transaction from taking place. For example, if insurance companies offer fire insurance at premiums that reflect a normal likelihood of fire damage, there is a danger that people who are insured against fire accidents will tend to behave less cautiously or even with malicious intent so that fire claims upon insurance companies are excessive.

Moral hazard can also apply to EMPLOYMENT CONTRACTS where employees may work less conscientiously than was expected in their employment contracts (i.e. they engage in ‘shirking’) if work supervision is not extensive (see TEAM PRODUCTION). Moral hazard can apply particularly to employment contracts of senior managers who might not act strictly as agents of the shareholders but pursue their own goals in the absence of sufficient shareholder scrutiny (see PRINCIPAL-AGENT THEORY). See ASYMMETRICAL INFORMATION.

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moral hazard

Moral hazard

Moral Hazard

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Words related to moral hazard

noun (economics) the lack of any incentive to guard against a risk when you are protected against it (as by insurance)

Related Words