Moral hazard

A moral hazard is an economic situation in which certain conditions may cause one party in a transaction to take on more risk. For example, if someone insures a valuable object for its full-value, they have less incentive to prevent its theft than if the object had been left uninsured. Another example would be members of military alliances having fewer disincentives to engage in provocative behavior, knowing that their allies will protect them from any retaliatory attacks.

The dismal science Economics

Economic Systems

$  Market Economy   €  Mixed Economy   ☭ Socialist Economy

Major Concepts

Alan Greenspan Capitalism Monetarism One-child policy Yanis Varoufakis

People

David Hume Friedrich August von Hayek Gary North Phil Gramm v - t - e

Moral hazards could most prominently be seen during the Great Recession, where banks would loan out large sums to people and then sell the loan obligation to someone else. As the banks were not on the hook if the person defaulted, the bankers had little reason to actually ensure that loans were only made to people likely to pay back the loans. Before the repeal of Glass-Steagall, these loans were only sold to other banks who understood this and would often use auditors when purchasing large groups of loans; after the repeal, the loans were sold to suckers who did not.

This article is a stub.
You can help RationalWiki by expanding it.