Moral Hazard (Noun)
Meaning
(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".
Classification
Nouns denoting natural processes.
Examples
- The new government policy aimed to reduce the moral hazard of bankruptcy by requiring companies to hold a minimum amount of assets.
- Insurance companies are exposed to a moral hazard if the insured party is not honest about the level of risk involved.
- The introduction of deposit insurance created a moral hazard in the banking system, as depositors no longer had an incentive to monitor the banks' risk-taking activities.
- The provision of guarantees by the government to support a struggling industry created a moral hazard, as companies had less incentive to cut costs and increase efficiency.
- The widespread use of derivatives has created a moral hazard in the financial system, as companies may take on excessive risk in the knowledge that they are protected by the contracts.