Preview

Moral Hazard Research Paper

Good Essays
Open Document
Open Document
409 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Moral Hazard Research Paper
It has long been recognized that a problem of moral hazard may arise when individuals engage in risk sharing under conditions such that their privately taken actions affect the probability distribution of the outcome

In economic theory,moral hazard is a situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk..
Economist Paul Krugman described moral hazard as: "...any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly. Financial bail-outs of lending institutions by governments, central banks or other institutions can encourage risky lending in the future, if those that take the risks come to believe that they will not have to carry the full burden of potential losses.
…show more content…

For example, a person with insurance against automobile theft may be less cautious about locking his or her car, because the negative consequences of vehicle theft are (partially) the responsibility of the insurance company.
Moral hazard also arises in a principal-agent problem, where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot completely monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.
1. A. Mas-Colell, M. Whinston, and J. Green (1995), Microeconomic Theory. Chapter 14, 'The Principal-Agent Problem', p.


You May Also Find These Documents Helpful

  • Good Essays

    Business Law

    • 447 Words
    • 2 Pages

    A principal and an agent are each personally liable for their own tortuous conduct. However the courts will hold a principal liable for the actions of its agent if the agent was acting within the scope of his or her authority. The court will examine the situation to see if:-…

    • 447 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    Euro Crisis 2009

    • 402 Words
    • 2 Pages

    Due to imperfect information of borrower makes and the lender cannot be able to distinguish between good and bad borrowers, the issue of adverse selection has been arisen and become the major reason of Euro Crisis in 2009.…

    • 402 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Adverse selection affects the outcomes in market economies by giving workers reason to change jobs. Perverse incentives can be important in market economies because they happen essentially on the fly. Principal agent problems can drastically affect the economy when, let’s say a major company, a CEO decides to make bad decision to get a large sum of money for himself. The prisoner dilemma shows how most people come straight to the conclusion that the other is going to “rat them out”.…

    • 1265 Words
    • 6 Pages
    Good Essays
  • Better Essays

    References: Case, K. E., Fair, R. C., & Oster, S. (2008). Principles of Macroeconomics (9th Edition). Prentice Hall.…

    • 1517 Words
    • 7 Pages
    Better Essays
  • Satisfactory Essays

    References: Case, K. E., Fair, R. C., & Oster, S. E. (2009). Principles of microeconomics…

    • 336 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    affect the production of goods and services, which ultimately will limit a consumer’s choices. In…

    • 408 Words
    • 2 Pages
    Satisfactory Essays
  • Satisfactory Essays

    Money Bank Quizzes

    • 2689 Words
    • 11 Pages

    | Moral hazard is an important concern of insurance arrangements because the existence of insuranceAnswer…

    • 2689 Words
    • 11 Pages
    Satisfactory Essays
  • Better Essays

    Demand Estimation

    • 927 Words
    • 4 Pages

    Hoagland, S. R. (2013, september 9). Microeconomics theory. Retrieved January 27, 2014, from ebscohost: http://eds.b.ebscohost.com/eds/detail?vid=3&sid=026f848e-5018-4e58-a077-88348a8f26ac%40sessionmgr113&hid=107&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d#db=e6h&AN=47669137…

    • 927 Words
    • 4 Pages
    Better Essays
  • Good Essays

    References: - Krugman, P., & Wells, R., (2009). Microeconomics: Second Edition , New York. Worth Publishers.…

    • 471 Words
    • 2 Pages
    Good Essays
  • Good Essays

    The risk that the failure of one or more troubled financial institution could trigger the contagious collapse of otherwise healthy financial institutions, and possibly endanger the stability of the financial system as a whole, is referred to as ---------------- ----------------.…

    • 290 Words
    • 2 Pages
    Good Essays
  • Good Essays

    Cause- and- Effect is being used every day at school, on the job, even in books in movies. I’m going to explain a cause and effect relationship regarding my favorite novel “The Help” written by Kathryn Stockett. The book is based upon African-American maids working in white households in Jackson, Mississippi, during the early 1960’s. I’m interested in this novel because it teaches young adults like myself on how African-Americans got treated back in time. I’m going to first start off by explaining when and where slavery begun. Slavery started in James Town, Virginia 1619, as stated in the book “a twenty-two year old girl by the name of Skeeter, has returned home after graduating from Ole Miss. She is looking for African-American maids to get…

    • 323 Words
    • 2 Pages
    Good Essays
  • Satisfactory Essays

    microeconomics

    • 293 Words
    • 2 Pages

    Define the principal agent problem= The Principal Agent problem arises when an employee acts in their own best interest instead of in the best interest of the company or stockholders.…

    • 293 Words
    • 2 Pages
    Satisfactory Essays
  • Powerful Essays

    • Principal agent problem: an instance in which one actor, a principal, contracts another actor,…

    • 3675 Words
    • 15 Pages
    Powerful Essays
  • Good Essays

    Moral Hazard

    • 831 Words
    • 4 Pages

    A few years ago when Hurricane Katrina wake, many people fled the ravaged Gulf Coast were spending disaster relief paid for by taxpayers, on tattoos, expensive handbags and making trips to their favorite places. In this case the damage has already done and people are using the debit cards issues by FEMA (Federal Emergency Management Agency). The debit cards are issued to buy the necessities like food and clothing. But the damage was done and people misused its money. FEMA swore that it would never hand out money like that again.…

    • 831 Words
    • 4 Pages
    Good Essays
  • Powerful Essays

    The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.…

    • 7796 Words
    • 32 Pages
    Powerful Essays

Related Topics